WAYNE T. SMITH and W. LARRY CASH, JURY TRIAL...

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE

CONSOLIDATED CIVIL ACTION NO.: 1 1-cv-0433

NORFOLK COUNTY RETIREMENT SYSTEM, individually and on behalf of all others similarly situated,

Plaintiff

V.

COMMUNITY HEALTH SYSTEMS, INC., WAYNE T. SMITH and W. LARRY CASH,

Defendants.

THIS DOCUMENT RELATES TO ALL ACTIONS

JUDGE JOHN T. NIXON MAG. JUDGE E. CLIFTON KNOWLES

JURY TRIAL DEMANDED

[REDACTED] CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

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TABLE OF CONTENTS PAGE

NATURE OF THE ACTION . 1

JURISDICTION AND VENUE...................................................................12

PARTIES............................................................................................. 13

ADDITIONAL SUBSTANTIVE ALLEGATIONS............................................18

A. CHS Developed a Corporate Culture Centered Around Boosting Admissions ............................................................18

B. CHS Ignored Patient Needs and Medicare Rules In Order to Boost Its Revenues...........................................................22

C. CHS' s Undisclosed Practices Increased Revenue Through Improper Patient Admissions..................................................26

1. CHS Used the Blue Book to Justify Systematic Admissions that Were Not Medically Necessary in Order to Boost Medicare Revenues...............................................................................26

a. Tenet's Complaint Contained Substantially Similar Allegations Regarding CHS's Adoption and Implementation of the Blue Book and the Resulting Increased Admissions at CHS .....................32

i. Chest Pain.................................................32

ii. Syncope or Pre-Syncope................................37

iii. Community Acquired Pneumonia....................39

iv. Cellulitis...................................................40

b. The Qui Tam Action Contained Substantially Similar Allegations..............................................................42

2. CHS and its Senior Leadership Rigged Pro-MED To Drive Improper Inpatient Admissions From Its ED.........................43

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CHS's Quotas and Financial Incentives, Along with its Enforcement Mechanisms, Ensured that CHS Personnel Met Admissions Targets.................................................................48

D. CHS's Admission Rates Diverged Dramatically Fromits Competitors......................................................................... 52

E. Lead Plaintiff's Statistical Evidence Shows That CHS' s Strategies Were Extremely Effective and Resulted in Admission and Observation Rates That Diverged Dramatically From its Competitors............................................54

1. CHS's Observation Rate vs. Industry...........................................54

2. CHS's Observation Rate vs. Average of High Quality Systems............ 55

3. CHS's Observation Rate vs. Rural Hospitals in Same Geographic Area... 56

4. Disproportionate Share of CHS's Admissions are "One-Day Stays ......... 57

F. CHS ' s Medicare Manipulation Enhanced the Company's Growth by Acquisition Strategy............................................ 59

G. CHS's Improper Admissions Practices Significantly Inflated its Revenues.........................................................................60

H. CHS's Admission Rates Steadily Decline After It Discontinues Use of The Blue Book ....................................................60

I. Additional Facts Supporting a Strong Inference ofScienter...............................................................................................61

J. Defendants' Additional Material Misstatements And Omissions During The Class Period..................................................70

Second Quarter 2006............................................................70

Third Quarter 2006 ..............................................................73

Fourth Quarter and Full Year 2006...........................................74

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PAGE

First Quarter 2007.........................................................79

Second Quarter 2007......................................................80

Third Quarter 2007 ........................................................82

Fourth Quarter and Full Year 2007......................................84

First Quarter 2008..........................................................86

Second Quarter 2008......................................................90

Third Quarter 2008.........................................................93

Fourth Quarter and Full Year 2008.................................... 95

First Quarter 2009..........................................................97

Second Quarter 2009.......................................................99

Third Quarter 2009.........................................................101

Fourth Quarter and Full Year 2009 ......................................102

First Quarter 2010.........................................................105

Second Quarter 2010......................................................107

Third Quarter 2010........................................................108

Fourth Quarter and Full Year 2010.....................................110

CHS's Attempt to Takeover Tenet.......................................110

CLASS ACTION ALLEGATIONS.................................................................118

LOSS CAUSATION/ECONOMIC LOSS.........................................................120

NOSAFE HARBOR .................................................................................. 121

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PAGE

CLAIMS FOR RELIEF...............................................................................122

COUNT I

Against All Defendants for Violations of Section 10(b) and Rule lOb-5 Promulgated Thereunder...................................122

COUNT II

Against the Individual Defendants for Violations of Section 20(a) of the Exchange Act.............................................................123

PRAYER FOR RELIEF..............................................................................124

DEMAND FOR TRIAL BY JURY................................................................. 125

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1. Lead Plaintiff, the New York City Pension Funds, as defined herein at 1138 -43,

for their Consolidated Class Action Complaint (the "Complaint"), alleges the following upon

personal knowledge as to themselves and their own acts, and upon information and belief based

upon the investigation made by and through their attorneys as to other matters. Lead Plaintiff's

investigation included, inter alia, a review and analysis of: (a) public documents pertaining to

Community Health Systems, Inc. ("CHS" or the "Company") and its senior executive officers

and directors including filings with the United States Securities and Exchange Commission (the

"SEC"); (b) analyst reports concerning the Company; (c) transcripts of CHS's earnings,

conference calls and investor presentations; (d) internal CHS documents produced by defendants

pursuant to this Court's order, dated March 23, 2012 (Docket No. 67); (e) facts provided by

confidential witnesses who are former employees of CHS; (f) statistical analyses performed

using the Center for Medicare and Medicaid Services ("CMS") database; and (g) the proceedings

in several related actions, including Tenet Healthcare Corporation v. Community Health

Systems, Inc., et al., 1 1-cv-00732-M (N.D. Tex.) (the "Tenet Litigation") and United States ex

rel. and Reuille vs. Community Health Sys. Professional Serv. Corp. and Lutheran

Musculoskeletal Ctr., LLC dlb/a Lutheran Hospital, Case No. 1:09-CV-0007 (N.D. Ind.) (the

"Qui Tam Action").

NATURE OF THE ACTION

2. This is a securities class action brought on behalf of all persons or entities who

purchased or otherwise acquired the publicly traded securities of CHS from July 27, 2006

through April 8, 2011 (the "Class Period"), and seeks recovery of monetary damages from CHS

and its senior officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act

of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5.

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3. This class action was precipitated by disclosures made in April 2011 by Tenet

Healthcare Corporation ("Tenet") in fending off CHS 's attempted hostile takeover of Tenet.

Tenet, a competitor in the same medical services field as CHS, revealed various practices that

CHS had employed for many years to improperly drive up patient admissions at its hospitals and

to inflate Medicare reimbursements. When Tenet exposed these undisclosed practices, which

subjected CHS to potential financial and legal liabilities to government regulators, private

insurance companies and patients, CBS stock immediately plummeted by nearly 36% in one day.

This dramatic decline reflected the materiality of the information and the market's appreciation

that, whether or not the government investigations lead to an indictment, the Company's

aggressive, non-industry admission practices would have to be discontinued, and investors could

no longer count on the high growth rates and Medicare reimbursements that CBS had

consistently reported over the years.

4. Lead Plaintiff, through its counsel, performed an independent investigation of the

veracity of Tenet's claims, including analyzing an enormous Medicare data set and interviewing

numerous former CHS employees who served in a variety of positions throughout the Company,

whose statements corroborate the substantive facts alleged in the Tenet Litigation. Similarly,

Tenet made clear that much of the factual allegations contained in its complaint was confirmed

by CHS's former "doctors, nurses, and hospital executives".

5. As detailed below, the Company has for years engaged in improper practices

designed to systematically drive up patient admissions at CHS hospitals, rather than observing

those patients, for financial rather than clinical reasons. These improper practices included the

use of a unique, non-industry set of aggressive admission justifications known as the "Blue

Book;" programming the "Pro-MED" software system used in the Emergency Department

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("ED" or "ER") of CHS hospitals to prompt patient admissions based upon testing and

treatments that were not medically necessary; and implementing incentive programs and quotas

to persuade CHS medical personnel to adhere to CHS 's admissions strategies.

6. These strategies, among others, enabled CHS to boost the volume of inpatient

admissions, which generated more Medicare revenues for CHS than if the patients were placed

in observation status or discharged. As a result, Defendants' public statements touting, inter

alia, CHS's admission rates and financial results, the "consistent execution of [CHS's]

centralized and standardized operating strategies," and "synergies" achieved at newly acquired

hospitals, were materially false and misleading.

7. Defendants misrepresented and failed to disclose numerous material facts during

the Class Period concerning CHS' s core business practices, including that:

• CHS was using a set of admissions criteria, known as the Blue Book that was inconsistent with industry standards;

• These internally created and liberal admissions criteria, along with the Pro- MED System that was rigged to raise patient acuity levels, and CHS' s quota, incentive and enforcement mechanisms, have caused CHS hospitals to systematically admit ED patients to the hospital whose medical condition did not require inpatient treatment, resulting in higher admission rates and Medicare reimbursements than CHS would have recorded had it admitted patients according to medical need, as required under Medicare rules and regulations;

• CHS has failed to accurately disclose the basis for increased admissions at its acquired hospitals - including how the number of one-day inpatient stays rose dramatically at CHS ' s acquired hospitals;

• CHS's reported revenues, profits and earnings growth were artificially inflated by virtue of its undisclosed deception.

8. Numerous former employees have provided details about CHS's patient

admissions scheme and, to the extent that Medicare and Medicare coverage was implicated, the

overbilling of Medicare. For example, Confidential Witness #1 ("CW #1") was a Charge Master

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Manager from 2004 until 2009 in the Revenue Management Department of CHS. CW #1

worked at CHS headquarters and was responsible for the programming and implementation of its

clinical software system, known as Pro-IVIED, throughout the entire Company, as well as training

ER staff consistent with CHS's admissions coding policies. Pro-MED was used by CHS to

record a patient's diagnosis, generate diagnostic tests, and "prompt" patients for admission. As a

Charge Master Manager, CW #1 was also responsible for training employees about CHS's

policies and procedures for charging Medicare and other issuers for the services rendered

through the ER.

9. According to CW #1, she was instructed by her managers, throughout her

employment, but particularly beginning in 2006, to "adjust" the Pro-MED software so that it

would "generate more admissions rather than observation orders." CW #1 was also instructed to

"adjust" CHS's Charge Description Masters for all of CHS's hospitals so that "Pro-MED would

boost the acuity of ER patients" to higher levels virtually assuring that the patient would be

admitted rather than placed in observation status. According to CW #1, these instructions to

alter Pro-MED amounted to "over-coding - making something out of nothing." CW #1 argued

with her supervisor, Craig Plattner ("Plattner"), about these improper admission practices that

were "driving admissions" because CHS was training its staff to "deliver a higher level of

service than the patients needed." CW #1 did not think it was right and believed it was insurance

fraud. CW#1 also believes that as much as 30% of CHS's ER admissions were inappropriate.

10. CW #1 also revealed that CBS's scheme to boost admissions was orchestrated at

the highest levels of CHS. CW #1 reported to Plattner, who was the Director of Revenue

Management. In her position at headquarters, CW #1 had direct access to CHS ' s senior

leadership, including Larry M. Carlton ("Canton"), CHS ' s Senior Vice President of Revenue

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Management and CHS's CFO, Defendant Larry Cash. Cash, Canton and Plattner were members

of a special revenue management committee at CHS (the "Revenue Conmilttee"), tasked with

creating CHS's admission policies aimed at boosting CHS's ER patient admissions. The

Revenue Committee decided to increase admissions, especially beginning in or about 2006, by

altering Pro-MED to boost the acuity levels of its ER patients and by hiring a half dozen "clinical

documentation specialists" to teach ER doctors and nurses how to write their orders in patients'

charts to justify their admissions in the event of an audit.

11. CW #1 specifically recalled Defendant Cash asking her questions at Revenue

Committee meetings about boosting the "census" (i.e., the occupancy rate) at specific CHS

hospitals that he wanted to target. Defendant Cash further asked CW #1 if "we can bump our

level 2s to level 4s" (referring to the Pro-MED acuity levels), in order to virtually guarantee that

more patients would be admitted. CW #1 also understands that the CEO Wayne Smith was well

aware of these improper admission policies because everything Cash and the Revenue

Committee did, needed "Wayne's approval."

12. CHS ' s senior executives were cognizant of the fact that their scheme to

improperly boost admissions could not succeed unless it was concealed. CW #1 was instructed

to make sure the changes she made to Pro-MED were done in such a way as to "survive an

audit." In addition, CW #1 also stated that the way in which CHS trained its staff to write orders

were all geared toward "escaping detection" and "surviving an [internal or external] audit".

13. CHS's scheme centered on driving up inpatient admissions because, according to

CHS and as alleged by Tenet, Medicare and managed care companies pay more for inpatient

treatment than for outpatient observation treatment, which involves a shorter hospital stay and

typically less testing and monitoring. By Tenet's estimation, CHS receives on average $3,500

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more from Medicare for a given inpatient admission than for outpatient observation status.

14. CHS employed three co-existing strategies to systemically boost ER admissions.

First, starting in or about 2000, CHS developed and implemented its own set of liberal

"Admission Justifications" and codified them in a small booklet known as the "Blue Book."

The Blue Book contained a set of aggressive admissions criteria that lacked a well-accepted

evidentiary basis. No other hospital in the U.S. used the Blue Book. Rather, over 75% of U.S.

hospitals utilized one of the following two sets of independent, third-party admissions criteria:

InterQual or Milliman, which are based upon objective, clinical results. InterQual was

developed by an independent panel of 1,100 physicians and medical providers, contain over

16,000 references to medical sources, and are used by 3,700 hospitals across the country, over

300 health plans and CMS. Similarly, the Milliman Care Guidelines, which have more than

15,000 medical references and are used by over 1,000 hospitals, were developed by an

experienced team of physicians and reviewed by approximately 100 independent doctors.

15. However, as Tenet explained, the Blue Book was structured around aggressive

"Admission Justification[s]." It was not an objective set of criteria for determining appropriate

patient treatment whether in observation or admission. Rather, its purpose was to provide a

mechanism for CHS management to justify to its medical staff criteria for the admissions of

patients who otherwise could have been observed and released. In that way, CHShospita1 could

maximize admissions and charge Medicare correspondingly higher amounts. InterQual, on the

other hand, rejects factors similar to these aggressive Blue Book Admission Justifications as a

basis for admitting a patient to the hospital. Even though the Blue Book was copyrighted in

2000 at the U.S. copyright office, CHS never disclosed to public investors its use of the Blue

Book's unique justifications to boost admissions.

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16. Former CHS employees confirm that CHS mandated that the Blue Book be used

in its hospitals and regularly trained its hospital personnel on how to use it in order to boost

admissions. For example, Confidential Witness #2 ("CW #2") worked as Regional Business

Development Manager for the Northeast Region of CHS from January 2006 through January

2007. CW #2 was responsible for developing new business and tracking patients for 12 of

CHS' s hospital-based hospice and homecare programs and reported directly to the director of

business development for CHS's homecare operations at CHS's headquarters. In that capacity,

CW #2 frequently met and worked with CHS's case managers, who are responsible for

reviewing the propriety of patient admissions. These hospital case managers informed CW #2

that CHS had one goal - if a patient came into the ER, "the goal was to get them admitted using

the Blue Book. The goal was not to do 23 hours of observation. It was to admit (the patient) and

start collecting the money."

17. CHS's second strategy was to program the Pro-MED software system to generate

medically unnecessary tests and procedures so as to assure that a patient would be admitted,

rather than just observed at CHS. Pro-MED was used to track patients as soon as they entered

the ED. Pro-MED was also used by CHS to order or "flag" tests and procedures, based on the

patient's presenting injury, and assign an acuity level (1 through 5) to each of CHS's ED

patients. If a patient's acuity level reached a high level, Pro-MEfl would prompt the admission

of the patient. As explained above through the information provided by CW #1, CHS

intentionally programmed Pro-MED to initiate tests and procedures for patients in the ED,

irrespective of whether the test or procedure was necessary, for the purpose of prompting

additional admissions of patients. Through a battery of unnecessary tests prompted by Pro-MED

and by training ER staff to use certain verbiage, ER rooms would boost the acuity levels of ER


patients so that they would qualify for admissions. According to CW #1, CHS did this for one

reason: "they just got greedy."

18. While Defendants Smith and Cash made public statements touting Pro-MED's

success in increasing ER admissions rates, particularly at CHS's newly-acquired hospitals,

Defendants failed to disclose that success had been largely achieved by programming Pro-MED

to raise patient acuity levels by prompting medically unnecessary testing and thereby increase

the volume of patient admissions.

19. CHS' s third strategy involved incentivizing its staff to meet pre-set "quotas" for

its admissions rate and by paying them bonuses or giving employees prizes. As detailed herein,

former CHS employees acknowledged that regional managers and hospital supervisors received

bonuses based on the percentage of Medicare patients admitted and how much revenue they

brought in. CW #2 succinctly put the matter: "If you didn't produce [admissions], you were

done."

20. Former CHS employees also disclosed that CHS had an admissions quota. For

example, Confidential Witness #3 ("CW #3") worked as an Emergency Room Director (from

2008 to 2011) at Haywood Park Community Hospital ("Haywood Park") and as an ICU nurse

(from 2005 to 2008) at Regional Hospital of Jackson (from 2008 to 2011). CW #3 reported to

Chief Nursing Officer, Steve Collins, and attendejl daily meetings with Haywood Park's CEO,

Jeremy Gray. CW #3 was responsible for directing and coordinating all aspects of Haywood

Park's ED and acted as a liaisons between the hospital's Administration and its medical staff.

According to CW #3, CHS set a quota for admissions and required its ED admission rate to be

20%. CW#3 also revealed that CHS paid bonuses to its employees based on the number of

Medicare admissions they achieved.

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21. CHS's undisclosed practices were highly successful in boosting its ED admission

rates. As part of its investigation, Lead Plaintiff retained a world-renowned expert in health

economics and finance to perform numerous statistical analyses of CHS 's Medicare data. This

healthcare consultant has worked for 25 years as a consultant for RAND, the largest funded

health research service in the world. He has previously been retained by the U.S. Department of

Health and Human Services, served as an expert witness for the Federal Trade Commission, and

testified before Congress on hospital healthcare issues. The results of Lead Plaintiff's healthcare

expert's Medicare data analysis support one inescapable conclusion: patients were much more

likely to be admitted at a CHS hospital than at other hospitals for higher paying treatment, rather

than being observed and discharged. Indeed, Lead Plaintiff's healthcare consultant found that

over 93% of CHS's hospitals have observation rates below the national average. This means that

a patient is far more likely to be treated in the higher-paying inpatient admission status, and far

less likely to be treated in lower-paying observation status, if the patient visits a CHS hospital

than if the patient visits a hospital operated by CHS's peers.

22. To explain, hospitals can treat in observation for 48 hours, indeed a full panoply

of treatment options are available in observation, so a high rate of single-day stays bespeaks of

an aggressive admissions policy. CHS admitted a significant number of patients who should

have been treated in observation,resu1ting in the percentage of CHS '5 admitted patients who

stayed in the hospital a single day being consistently higher than the industry average during the

Class Period. Indeed, Lead Plaintiff's healthcare consultant found that nearly 70% of CHS

hospitals admitted ER patients for one-day stays at a rate substantially above the national

average.

23. The impact of CHS's scheme is illustrated through CHS's acquisition of Triad

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Hospitals, Inc. ("Triad") in July 2007, which added 50 hospitals to CHS. As revealed in the

Tenet Litigation, in the year following the acquisition, CHS implemented its ED practices in the

newly acquired Triad hospitals, imposing the Blue Book over - the more widely accepted -

InterQual admission criteria which Triad had been using. Triad's use of observation status for

patients at the former Triad hospitals decreased by more than 50%. This shifted would-be

observed patients to inpatient admitted status to generate substantial additional revenue for CHS.

Unsurprisingly, Triad's percentage of "one-day stay" admissions, which Medicare auditors

consider to be potentially indicative of improper admissions, increased by 33% in the year

following the CHS acquisition, with even higher increases for patients with common conditions

such as chest pain, syncope, and GI-bleed.

24. While attributing its success to "synergies" and "greater operating efficiencies"

achieved in the Triad acquisition, CHS failed to disclose that the apparent success was driven in

large part by employing CHS's suspect admission strategies at Triad to systematically boost

admissions.

25. On April 11, 2011, as part of its effort to fend off a hostile takeover by CHS,

Tenet filed a report on SEC Form 8-K that disclosed the results of its own investigation into

CHS 's improper admission practices. On the same day, Tenet filed a complaint in the United

States District Cpurt for the Northern District of Texas, in which it identified several false anchor

misleading statements in CHS's proxy disclosures about the basis of its admission statistics,

revenues and potential synergies to be achieved in the event Tenet was acquired by CHS.

26. Tenet also alleged that CHS' s improper practices resulted in CHS receiving

additional revenues from Medicare alone of up to $306 million during 2006-2009, and up to

$345 million during 2003-2009.

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27. The market's response to these revelations was immediate and dramatic - CHS

common stock plunged nearly 36 percent, or $14.41, from a close of $40.30 on Friday, April 8,

2011 to close at $25.89 on Monday, April 11, 2011.

28. In response to Tenet's allegations, CHS acknowledged that it had recently decided

to move from the Blue Book to JnterQual, but falsely represented that (1) the Blue Book and

InterQual had similar admission criteria, and (2) the Blue Book was "based on current clinical

practice." Moreover, although Smith and Cash both made public statements during the Class

Period touting Pro-MED's ability to increase ED admissions, particularly at newly-acquired

hospitals, Defendants, in an obvious attempt to buoy CHS ' s market price, falsely denied that

Pro-MED impacted ED admission rates.

29. Moreover, after Tenet filed its complaint, CHS belatedly disclosed that it

currently was the target of numerous government investigations, including an investigation by

the U.S. Department of Health and Human Services, Office of the Inspector General (the

"OIG"), and various United States Attorneys' offices, as well as the State Attorney General of

Texas, that related to its ED admissions practices and Medicare billing.

30. CHS also belatedly revealed that it had received a letter in the Fall of 2010 from a

shareholder group, CtW Investment Group, identifying and requesting that they halt the same

improper and unsustainable admissions practices at CHS hospitals as alleged in this action.

31. CHS also belatedly disclosed, after Tenet's allegations were made public, that

these same allegations of improper admissions practices were raised in the Qui Tam Action filed

on January 7, 2009 against CHS and/or its subsidiaries. The Qui Tam Action was unsealed on

December 27, 2010, but CHS chose not to disclose these facts to investors until mid-April 2011.

32. Defendants were also aware of, but did not disclose, other government

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investigations and/or audits regarding CHS's billing practices. Lead Plaintiff obtained through

information provided by Confidential Witness #4 ("CW #4"), who was the former

Administrative Director of Payson Regional Medical Center, a CHS-operated hospital in Payson,

Arizona ("Payson"), from 2002 to 2007, who reported to Payson's CEO, Chris Wolf, who in turn

reported to Bill Hussey, President of Division 1Y Operations. CW #4 revealed that an Arizona

state agency, which he believed to be the Arizona Department of Health, audited CHS' s

admission practices and operations between 2005-2007 and found that "it had a significantly low

rate of observation" and higher than normal number of short patient stays in the hospital,

admissions of just over 24 hours.

33. CHS 's improper practices and strategies have ultimately proven to be

unsustainable. As CHS reduced and then discontinued the use of the Blue Book - its rate of

same-store hospital admissions steadily declined.' Moreover, notwithstanding CHS' s repeated

denials of Tenet's allegations and other efforts described herein to influence the market, CHS' s

stock price has remained at its pre-inflation levels.

JURISDICTION AND VENUE

34. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange

Act, 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule lOb-S promulgated thereunder.

35. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act, 15 U.S.C. § 78aa.

36. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15

U.S.C. § 78aa, and 28 U.S.C. § 1391(b).

Same-store admissions is an industry term used by CHS in its public filings to measure year-to-year changes in certain metrics, such as inpatient admissions, for hospitals in CHS' s portfolio for at least one year.

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37. In connection with the challenged conduct, defendants, directly or indirectly, used

the means and instrumentalities of interstate commerce, including, but not limited to, the U.S.

mails, interstate telephone communications, and the facilities of the national securities markets.

PARTIES

38. Lead Plaintiff the New York City Employees' Retirement System ("NYCERS"),

the Teachers' Retirement System of the City of New York ("NYCTRS"), the New York City

Fire Department Pension Fund ("FIRE"), the New York City Police Pension Fund ("POLICE"),

and the Teachers' Retirement System of the City of New York Variable Annuity Program

("NYCTRS Variable A") (collectively, the "Funds" or "Lead Plaintiff'), are part of one of the

largest pension systems in the nation. As of March 31, 2012, Lead Plaintiff collectively had

more than $120.8 billion in assets, and had approximately 623,000 active and retired members.

On December 28, 2011, this Court duly appointed the Funds as Lead Plaintiff in this action.

39. NYCERS, established under Section 12-102 of the Administrative Code of the

City of New York, provides pension benefits to all New York City employees who are not

eligible to participate in separate Fire Department, Police Department, Teachers, or Board of

Education pension funds.

40. NYCTRS maintains two separate retirement programs, the Qualified Pension Plan

("QPP") and the Tax-Deferred Annuity Program ("TDA"). The QPP, established pursuant to

Section 13-502 of the Administrative Code of the City of New York, provides pension benefits

to those with regular appointments to the pedagogical staff of the New York City Board of

Education. The TDA, also known as NYCTRS Variable A, was established pursuant to Internal

Revenue Code Section 403(b), to provide a means of deferring income tax payments on

voluntary tax-deferred contributions.

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41. FIRE, established pursuant to Section 13-301 of the Administrative Code of the

City of New York, provides pension benefits for full-time uniformed employees of the New

York City Fire Department.

42. POLICE, created pursuant to New York Local Law 2 of 1940, provides pension

benefits for full-time uniformed employees of the New York City Police Department.

43. Each of the Funds purchased or acquired CHS common stock during the Class

Period and suffered damages as a result of the federal securities law violations alleged herein.

During the Class Period, the NYC Funds purchased a total of approximately 762,966 shares of

CHS common stock on the open market, as set forth in their certifications previously filed in

connection with the motion for appointment as the Lead Plaintiff. See Docket No. 34.

44. Defendant CHS is a Delaware corporation headquartered at 4000 Meridian

Boulevard in Franklin, Tennessee. CHS's common stock is listed on the New York Stock

Exchange (the "NYSE") under the ticker symbol "CYH."

45. CHS is the largest publicly traded hospital operator in the United States. The

Company currently operates and leases more than 131 acute-care hospitals in non-urban markets

in 29 states. For 2011, CHS reported $13.6 billion in net revenue. Since approximately 27

percent of CHS ' s net operating revenue is derived from Medicare reimbursement payments, the

Company readily acknowledges that its success depends in large measure upon its ability to

comply with the Medicare Program.

46. Defendant Wayne T. Smith ("Smith") has served as CHS's Chairman of the

Board of Directors (the "Board"), President and Chief Executive Officer ("CEO") since 2001.

Smith also served as CHS's CEO, President and as a CHS director from 1997 to 2001. In

addition to CHS, Smith has been an executive and/or director of several public companies

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operating in the healthcare industry, including Humana, Inc. ("Humana"), the Nashville

Healthcare Council and the Federation of American Hospitals.

47. As an experienced industry professional, Smith was aware that CHS was required

to comply with Medicare reimbursement standards and other federal and state laws.

Nonetheless, he approved of improper inpatient admission practices at CHS hospitals for the

purpose of obtaining higher and unwarranted payments from Medicare and other third-party

payers; closely monitored the results of the centralized and systemic strategy employed at CHS

hospitals; and made materially false and misleading public statements about CHS's business

practices and financial performance during the Class Period.

48. While in possession of material, non-public information concerning CHS's true

business operations, Defendant Smith sold 500,000 shares of his Community Health stock for

$16,770,301 in proceeds as follows:

Insider Last Transaction Shares Price Proceeds Name Date SMITH 5/20/2009 250,000 $26.07 $6,518,650

5/13/2010 243,093 $41.02 $9,971,918 5/13/2010 6,907 $40.50 $279,733

500,000 1 $16,770,301

49. Defendant W. Larry Cash ("Cash") has been CHS's Chief Financial Officer

("CFO") and Executive Vice President since 1997 and a Director since 2001. In addition to

CHS, Cash has been an executive anchor director of several public companies operating in the

healthcare industry, including ColumbiafHCA Healthcare Corporation, Humana and Cross

Country Healthcare, Inc. As an experienced industry professional, Cash was aware of the

standards for Medicare reimbursement as well as other applicable federal and state laws.

Nonetheless, he approved of and promoted improper inpatient admissions practices at CHS

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hospitals for the purpose of obtaining higher and unwarranted payments from Medicare and

other third-party payers; closely monitored the results of this systematic strategy employed at

CHS hospitals; and made materially false and misleading public statements about CHS' s

business practices and financial performance.

50. Strongly indicative of his scienter, Defendant Cash sold 480,000 shares of his

CHS stock netting $17,069,760 in proceeds. The following stock sales occurred while Cash was

in possession of material, non-public information concerning CHS 's true business practices that

improperly boosted ER admissions:

Insider Last Transaction Shares Price Proceeds Name Date CASH 8/4/2009 240,000 $30.79 $7,388,400

4/26/2010 240,000 $30.34 $9,681,360

480,000 $17,069,760

51. These stock sales were completed while Cash was in possession of material

information about CHS's improper revenue generation, which was not disclosed to CHS's

investors, are strong indicia of scienter.

52. Defendants Smith and Cash are collectively referred to herein as the "Individual

Defendants," and together with CHS, are referred to as the "Defendants."

53. During the Class Period, the Individual Defendants, as senior executive officers

and/or directors of CHS, were privy to confidential and proprietary information concerning CHS,

its operations, finances, financial condition, and present and future business prospects. The

Individual Defendants also had access to material adverse, non-public information concerning

CHS, as discussed in detail below. Because of their positions with CHS, the Individual

Defendants had access to non-public information about the Company's business, finances, and

future business prospects through access to internal corporate documents, reports, conversations,

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and their connections with other corporate officers and employees, and their attendance at

management and/or board of directors meetings and committees. Because of their possession of

such information, the Individual Defendants knew of, and/or recklessly disregarded, the

Company's misrepresentations during the Class Period.

54. The Individual Defendants are liable as direct participants in the wrongs

complained of herein. In addition, the Individual Defendants, by reason of their status as senior

executive officers and/or directors, were "controlling persons" within the meaning of Section

20(a) of the Exchange Act, and had the power and influence to cause the Company to engage in

the unlawful conduct complained of herein. Because of their positions of control, the Individual

Defendants were able to, and did, directly or indirectly, control the conduct of CHS' s business.

55. The Individual Defendants, because of their positions with the Company,

controlled and/or possessed the authority to control the contents of CHS ' s reports, press releases,

and presentations to securities analysts and, through them, to the investing public. The

Individual Defendants were provided with and approved the Company's reports and press

releases alleged herein to be misleading, and had the ability and opportunity to prevent their

issuance or cause them to be corrected. Many statements in public company releases were

specifically made by the Individual Defendants. Thus, the Individual Defendants had the

opportunity to commit the fraudulent acts alleged herein.

56. As senior executive officers and/or directors and as controlling persons of a

publicly-traded company whose common stock is registered with the SEC, traded on the NYSE,

and governed by the federal securities laws, the Individual Defendants had a duty to promptly

disseminate accurate and truthful information with respect to CHS ' s financial condition and

performance, growth, operations, financial statements, business, products, markets, management,

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earnings, and present and future business prospects, and to correct any previously issued

statements that had become materially misleading or untrue so that the market price of CHS 's

securities would be based upon truthful and accurate information. The Individual Defendants'

misrepresentations and omissions during the Class Period violated these specific requirements

and obligations.

ADDITIONAL SUBSTANTIVE ALLEGATIONS

A. CHS Developed a Corporate Culture Centered Around Boosting Admissions

57. Throughout the Class Period, Defendants routinely made materially false and

misleading statements to CHS investors concerning its operations, financial performance and

admission rates in failing to disclose that those successful results were driven in large part by a

corporate culture and practice at CHS that improperly boosted admissions in order to collect

more revenue from Medicare and other third-party payers such as insurance companies. As

Defendant Cash was quick to highlight, "almost 60% of [CHS's] admissions, legacy CHS came

through the emergency room" (March 4, 2008 Raymond James Institutional Investors

Conference). As a result, CHS's ability to drive up ER admissions rates in existing and newly

acquired hospital was critical to the Company's financial performance.

58. To accomplish this apparent growth, CHS developed aggressive admissions

criteria, codified in a booklet known as the Blue Book. CHS hospitals were required to adopt the

Blue Book, and the Company held training conferences for its medical and administrative staff

on how to use Blue Book to justify admissions. In addition, CHS utilized Pro-MED, a software

program that guided CHS' s medical professional's diagnostic and clinical determinations, in

each hospital ED. Along with the Blue Book, Pro-MED was programmed, at the direction of

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senior CHS managers and executives, to increase the likelihood that a patient would be admitted

at CHS rather than observed.

59. As noted above, CHS's scheme was orchestrated from the Company's

headquarters where the Revenue Committee was formed to, inter alia, implement financial

policies and track CHS' s financial metrics, including hospital admissions. According to CW #1,

whose direct supervisor (Plattner) was a member of the Revenue Committee, the Revenue

Committee met weekly on the third floor of CHS headquarters in Franklin, Tennessee. From

that location the Revenue Committee was able to track the admissions of every CHS hospital on

a daily basis.

60. As explained by CW #1, the members of the Revenue Committee included some

of CHS' s senior executives, including Defendant Cash, Michael Miserocchi (the Vice President

of Clinical Services who reported directly to Defendant Wayne Smith), Larry Canton (Senior

Vice President of Revenue Management), Margaret Redmon (Senior Director of Revenue

Management), Craig Plattner (Director of Revenue Management) and Carol Hendry (Vice

President of Compliance).

61. CW #1 reported to Craig Plattner who, among the other members of the Revenue

Committee, monitored CHS's "census" through CHS Health Management Systems and its data

warehouse, which recordd admissions, observation status, revenues, and other data on a "daily

basis."

62. CW #1 explained that Defendant Larry Cash and Larry Canton "ran everything

[the Revenue Committee] did past Wayne Smith." Further, CW #1 stated that Defendant Cash

and Carlton "could not make decisions without Wayne's approval." Thus, the Revenue

Committee reported directly to Wayne Smith.


63. Another former employee interviewed by Lead Plaintiff, Confidential Witness #5

("CW #5") also worked at CHS's headquarters as a Senior Financial Analyst for the Financial

Reporting Information Team from 2008-20 10 and reported to Scott Gardner (a former Director

of Application Services). CW #5 participated in weekly committee meetings at CHS

headquarters in which all of the controllers for each of CHS '5 five operational divisions

participated and his group worked to determine how admissions were processed for billing and

financial reporting purposes for the entire Company. CW#5 stated that the committee

standardized the rules for counting admissions and other hospital services for all CHS hospitals

and the newly acquired Triad hospitals. CW #5 explained that the committee referred to the

Blue Book and applied sections of it to the uniform standards the committee was establishing.

CW #5 stated that it was his group's task to implement any of changes the committee made to

CHS ' s company-wide healthcare management system.

64. In order to centrally organize its hospitals, CHS divided CHS's geographically

diverse hospitals into five geographical "Divisions" as follows: 2

As indicated in the documents produced by CHS, each Division is headed by a

Presiden

Each Division

2 According to CHS' s internal records, the states encompassed within each Division have, from time to time, been reorganized between Divisions.


Presentations, a few of which CHS produced to Lead Plaintiff, report

were closely monitored by CHS.

66. The admission statistics of each Division and the hospitals within each Division

67. Moreover, the Board presentation submitted by Division HI's President, Gary


REDACTED 69. Moreover, according to the minutes of the Board meeting held on

the Board of Directors reviewediREDACTED prepared by

B. CHS Ignored Patient Needs and Medicare Rules In Order to Boost Its Revenues

70. CHS's failed to disclose that the Company had adopted a policy that violated a

fundamental principle of medical care: to treat patients based upon their clinical needs, not to

boost the hospital's bottom line, and to seek reimbursement for only those services that are

reasonable and medically necessary to serve the patient.

71. As initially explained by Tenet, when a patient suffering from a medical condition

seeks treatment at a hospital's emergency department or is otherwise referred to the hospital,

physicians have three choices with respect to forms of treatment: (1) admit the patient to the

hospital on an inpatient basis; (2) admit the patient on an outpatient observation basis for care

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and monitoring that is expected to last less than 24 hours; or (3) not admit the patient, instead

discharging the patient following treatment.

72. Tenet also described Medicare rules that govern patient treatment. The use of

observation status to treat patients is widely recognized as an essential tool for improving clinical

decision making and providing cost effective medical care. Under the Medicare Benefit Policy

Manual:

Observation care is a well-defined set of specific, clinically appropriate services, which include ongoing short term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital. Observation services are commonly ordered for patients who present to the emergency department and who then require a significant period of treatment or monitoring in order to make a decision concerning their admission or discharge.

Medicare Benefit Policy Manual, Chapter 6, Section 20.6A.

73. Tenet explained that admission on an outpatient observation basis is warranted for

patients who present with certain types of medical conditions, citing Louis Graff, MD, Principles

of Observation Medicine, in Observation Medicine (Louis Graff ed. 2010), available at

http://www.acep.org/content.aspx?id=46142&terms= Observation%20Medicine. For example,

outpatient observation care is appropriate for patients whose medical conditions require

diagnostic evaluation because: (1) the balance between the probability and severity of disease

warrants further evaluation; (2) the patient presents a condition that cannot be readily diagnosed

without additional testing; or (3) the physician needs more time to evaluate the patient's

symptoms to determine the most appropriate medical treatment.

74. Outpatient observation care is also appropriate for patients who require short-term

treatment of emergency conditions. In addition, patients who require therapeutic procedures that

do not necessitate inpatient admissions, but who nonetheless require some period of hospital

care, are generally treated in observation.


75. One benefit of outpatient observation care is its cost effectiveness relative to

inpatient treatment, because the former requires shorter hospital stays and, typically, less testing

and monitoring. The decision of whether to treat a patient on an inpatient admission basis or

outpatient observation basis has significant financial ramifications for hospitals. Hospitals

receive a much larger reimbursement from Medicare for treatment of a patient on an inpatient

admission basis than on an outpatient observation basis. Accordingly, hospitals may have a

financial incentive to improperly steer patients into inpatient admissions, rather than treat

patients appropriately on an outpatient observation basis, and must employ safeguards to ensure

their billing practices are appropriate. According to the Medicare Payment Advisory

Commission (MedPAC), the independent Congressional agency that advises the U.S. Congress

on issues affecting the Medicare program, for some patients, the Medicare program reimburses

hospitals nearly 1000% more (or approximately $7,000 more per patient) when the patient is

admitted to the hospital as compared to treatment for the same patient in observation status. 3

76. Tenet also explained that to temper this incentive, Medicare laws and guidelines

prohibit hospitals from billing Medicare for treatment of a patient admitted to the hospital unless

a physician, at the time the patient presents to the hospital, determines that the severity of the

patient's condition requires care that the physician expects to meet or exceed 24 hours, and that

placing the patient in a less intensive setting would significantly and directly threaten the

patient's safety or health. See Medicare Benefit Policy Manual, Ch. 1 § 10; Medicare Program

Integrity Manual, Ch. 6 § 6.5.2. In particular, under federal law, Medicare reimburses hospitals

only for treatment that is "reasonable and necessary for the diagnosis or treatment of illness or

injury." 42 U.S.C. § 1395y(a)(1)(A). In addition, Medicare intermediaries who make Medicare

Presentation, MedPAC, "Recent Growth in Hospital Observation Care" (Sept. 30, 2010), available at http://www.medpac.gov/transcripts/observation%2Osept%2020 10.pdf.


payments are prohibited under federal law from using Medicare funds to pay for services if those

services were not "medically necessary, reasonable, and appropriate for the diagnosis and

condition of the beneficiary." Medicare Program Integrity Manual, Ch. 6 § 6.5.2. In this regard,

"[i]patient care, rather than outpatient care is required only if the beneficiary's medical

condition, safety, or health would be significantly and directly threatened if care was provided in

a less intensive setting." Id. In sum, federal law and applicable Medicare guidelines establish

that, absent a medical need to treat the patient on an inpatient basis, Medicare is not responsible

for payment of inpatient treatment.

77. Moreover, on information and belief, the use of outpatient observation, instead of

inpatient admission, is appropriate when the need for inpatient admission cannot be medically

determined and when additional time is needed to evaluate the patient or when the physician

believes the patient will respond rapidly to treatment. Medicare coverage for outpatient

observation is limited to a 48 hour period unless the fiscal intermediary grants an exception.

78. Tenet alleged that CHS contravened these Medicare provisions by utilizing the

Blue Book's inappropriate inpatient admissions criteria. The purpose of the Blue Book was to

provide a basis for CHS management to justify to its medical staff criteria for the admission of

patients who otherwise could have been observed and released.

79. Defendants were experienced in providing billing to Medicare patiets and knew

the prohibitions at all relevant times. Defendants knew (i) the risks associated with establishing

admissions criteria that improperly steered patients to costly inpatient admissions at CHS

hospitals in order to collect unwarranted payments from Medicare and other sources; and (ii) that

CHS could incur significant penalties and liability arising from federal and state investigations

and proceedings, as well as private lawsuits and loss of goodwill, if they did not comply with

2499 / CMP / 001 1 3578.DOCX v5 ) 25


applicable rules and regulations, other legal obligations, and widely accepted standards of

clinical care.

80. As described herein, CHS ' s allegedly improper admissions practices are the

subject of governmental investigations and private proceedings which the Company chose not to

reveal until after these practices were exposed in the Tenet Litigation.

C. CHS's Undisclosed Practices Increased Revenue Through Improper Patient Admissions

1. CHS Used the Blue Book to Justify Systematic Admissions that Were Not Medically Necessary in Order to Boost Medicare Revenues

Under Medicare regulations, hospitals are required to maintain a set of admissions

guidelines for determining whether a patient's condition is serious enough to warrant inpatient

treatment. Such criteria are required to support treatment that is medically necessary. 42 C.F.R.

§ 482.30(c)-(d) ("The UR plan must provide for review for Medicare and Medicaid patients with

respect to the medical necessity of -- (i) Admissions to the institution; (ii) The duration of stays.

82. As alleged herein, in contravention of these Medicare rules, CHS developed

corporate-wide admissions criteria under the Blue Book that systematically encouraged

medically unnecessary inpatient admissions at its hospitals. Numerous former employees have

confirmed that CHS physicians and case managers were required to use the Blue Book for

purposes of justifying the admission of a patient into a CHS facility. According to the terms of

the Blue Book ,4 it contains admission criteria for the "most commonly encountered clinical

Consistent with the Court's scheduling order (Docket No. 67), CHS produced certain internal corporate records to Lead Plaintiff, including four versions of the "Blue Book" from the following years: 2006, 2007, 2009, and 2010. In addition, the NYC Funds obtained a 2003 version of the "Blue Book" through its investigation of the claims asserted against CHS herein. Each iteration of the Blue Book contained similar non-standard, aggressive admissions criteria. For illustrative purposes, this complaint refers to the


scenarios presenting to a typical CHS facility." As described by Tenet, the Blue Book was

designed to address patient conditions typically presented at CHS ' s emergency departments,

such as chest pain, syncope, pneumonia, gastrointestinal bleeding, and atrial fibrillations.

83. Senior executives mandated that the Blue Book be used at CHS hospitals to the

exclusion of other independent criteria. According to CW #4 CHS executives, including Carolyn

Lipp ("Lipp"), a Senior Vice President of Quality and Utilization Management who, on

information and belief, reported directly to Defendant Smith, required the use of the Blue Book

and enforced its use through her regional managers. CW #4 also stated that Lipp held annual

meetings at CHS's headquarters that focused on the Blue Book and stressed to CHS employees

that CHS does not use "other admission[s] criteria." In this way, CHS made sure all of its

hospitals were utilizing the Blue Book's liberal admissions criteria.

84. CHS encouraged its staff to make sure that physicians were using the Blue Book,

because CHS knew it was designed to lead to increased admissions. Another former employee,

CW #3, who was the Emergency Room Director at Haywood Park, stated that the Blue Book

was "on the counter" at the ER and that she was encouraged by CHS management to inform

doctors to use it. CW #3 explained that CHS used the Blue Book because CHS was "able to get

more money" and that "[every admission was looked at again and again with the goal to keep

the doors open." CW #3 added that the Blue Book outlined "anything Medicare was going to

pay for", including specific tests and procedures. CW #3 explained further that since Haywood

was in a very poor, rural area that served many people without insurance, Medicare "was a sure

payment" for CHS.

85. According to a CW #2, confirmed that CHS conducted on-site training on the

Blue Book for "admitting and discharging patients, " which assured that hospitals were utilizing

2009 version of the Blue Book.


the Blue Book to its maximum effect.

86. Another former employee, Confidential Witness #6 ("CW #6"), worked as the

Director of Case Management at Weatherford Regional Hospital in Weatherford

("Weatherford"), Texas from 2007-2008, and as the Director of Case Management at Lake

Granby Medical Center in Granby, Texas ("Granby") from 2005-2007. CW #6 was responsible

for training case managers and reviewing medical records daily to determine the appropriateness

and medical necessity of admission at both Weatherford and Granby hospitals. At Granby, CW

#6 was responsible for redesigning CHS ' s case management program in order to reduce patients

length of stays. CW #6 was transferred to Weatherford, which was recently acquired by CHS, to

implement CHS's model of case management. CW #6 reported to Chief Nursing Officer Steve

Collins at Weatherford. CW #6 indicated that she used the Blue Book and her Case

Management Manual, and received training, along with others, for the Blue Book at CHS's

headquarters in 2005. CW #6 stated that CHS hospital CEOs, CFOs, case managers and

physicians attended the three-day Blue Book orientation, which she confirmed was led by Lipp,

CHS' s Senior Vice President of Quality and Utilization Management at CHS ' s headquarters.

87. Lead Plaintiff also received information from Confidential Witness #7 ("CW #7)

who was a former Controller at Marion County Regional Hospital in South Carolina ("Marion")

from March 1986 until September201 1. CHS acquired Marion in 2010 which is in CHS's

Division I. CW #7 was responsible for maintaining Marion's books and finances and reported to

Marion's business office manager, Elisa Smith. CW #7 stated that when Marion was purchased

by CHS in 2010, Marion was told to "scrap InterQual and use the Blue Book." Consistent with

the fact that the Blue Book was an unsustainable guideline, CW #7 stated that after Tenet filed its

lawsuit, CHS reverted to using InterQual at Marion.

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88. Confidential Witness #8 ("CW #8") worked at CHS as the Director of Emergency

Services at CHS '5 Western Arizona Regional Medical Center ("Western"), from October 2004 to

January 2006, and reported to JoAnn Kimball, CHS's Chief Nursing Officer. CW #8 was

responsible for all Western's ER operations including designing a plan to address Western's

overwhelming number of ER patients. CW #8 was hired by CHS to "fix problems" in the ER at

Western relating to the large number of patients coming through the ER, which was "one of the

busiest in the country." CW #8 explained that CHS 's case and risk managers from headquarters

would send the Blue Book "in bulk" and the staff kept them on their desks. CW #8 stated that

the ER staff would always refer to the Blue Book for any patient that came into the ER to see if

the patient qualified for admission.

89. By creating and adopting the Blue Book, CHS rejected two widely accepted sets

of admissions criteria which are used by over 75% of the hospitals in the United States, namely,

InterQual criteria and the Milliman Care Guidelines ("Milliman"). InterQual was developed by

an 1,100-member panel of independent physicians and medical professionals, is used by is used

by approximately 3,700 hospitals, CMS 5 , state Medicaid programs, Medicare Quality

Improvement Organizations in 40 states, and various Medicaid payers and private health plans.

Milliman is used by 1,800 of its clients, including over 1,000 hospitals, 25 CMS auditors and 7

of the 8 largest U.1S. health plans.

90. Together, InterQual and Milliman are used by over 75 percent of all hospitals in

the United States, with approximately 60 percent using InterQual and approximately 16 percent

using Milliman Care Guidelines.

91. As revealed in the Tenet Litigation, the Blue Book has none of the attributes of

In September 2011, CMS (the federal agency responsible for administering Medicare and other programs) announced that for the twelfth consecutive year that it would be using InterQual for its Medicare inpatient auditing programs.

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the InterQual or Milliman Care Guidelines. Rather, the Blue Book is a small 40-page booklet

that sets forth the "Admission Justification [s]" for the most common medical conditions

presented by CHS patients. CW #2 noted that the Blue Book was "child-sized" and "obviously

over simplified." The Blue Book is not independent or objective, but rather was developed by

CHS and, upon information and belief, has never been externally tested by physicians

unaffiliated with CHS. Unlike InterQual or Milliman, the Blue Book lacks a single reference to

a medical journal or other resource, and its criteria for admitting patients into the hospital are

demonstrably more lenient, general, and subjective than the evidence-based criteria used

throughout the rest of the industry. Indeed, in many cases the Blue Book contains admissions

criteria where there is no clinical basis to admit the patient.

92. According to CW #3, a former ER Director at Haywood, CHS took the typical

chest pain protocol contained in the Blue Book to "a new level." CW #3 stated that CHS would

order EKGs and enzyme tests; family histories and secondary illnesses would be recorded in

order to generate a higher acuity level and, thus, more revenue for CHS even though it was

unnecessary. CW #3 stated that this was done because CHS was able to get higher

reimbursements for that type of patient.

93. The purpose of CHS's Blue Book criteria and admissions practices was clear: by

açlmitting patients who, under accepted clinical criteria utilized throughout the hospital industry,

should have been treated in observation or sent home, CHS receives substantially more money

from Medicare than if the patient had been treated in outpatient observation status - an average of

over $3,500 in 2009 - more per patient for CHS's highest volume and lowest acuity admitted

patients, as found by Tenet. The financial impact is much higher for patients with less common

conditions who are improperly admitted to a CHS hospital. As a result, taxpayers, insurers,

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businesses, and individuals have paid CHS hospitals more than they should for medical

treatment.

94. The Blue Book contains far more subjective and liberal criteria for admitting

patients into the hospital than the accepted clinical, decision-making, and evidence-based

guidelines used by peer hospital systems across the country. A patient who visited a CHS

hospital was, therefore, far more likely to be admitted on an inpatient basis than if that same

patient visited any other hospital that properly admits patients on an inpatient basis based upon

clinical need.

95. As a result, CHS created a culture at its hospitals where patients admissions were

promoted whereas outpatient observation was discouraged, even in cases where it was medically

preferable. CW #2 was told by hospital case managers that CHS's Vice President of Case

Management had instructed them that "the goal was to get patients admitted using the Blue

Book." According to CW #2, "the goal was to get them admitted using the Blue Book. The goal

was not to do 23 hours of observation. It was to admit (the patient) and start collecting the

money." These highly suspect practices were never disclosed to CHS's investors, causing

millions of dollars in losses when CHS's stock plunged on the revelation of CHS's scheme.

96. On information and belief, even when CHS's patients were admitted on an

inpatient basis but spent less than 24 hours in the hospital, CHS billed Medicare for an inpatient

admission at a significantly higher cost than if the patient had been admitted on an outpatient

observation basis. The Blue Book instructs CHS employees to admit patients on an inpatient

basis and quickly discharge them after tests and treatment rule out serious medical conditions.

This allows CHS to bill Medicare for far more than what would be actually justified by patients'

medical needs.


a. Tenet's Complaint Contained Substantially Similar Allegations Regarding CHS's Adoption and Implementation of the Blue Book and the Resulting Increased Admissions at CHS

97. Tenet's revelations about CHS's practices and the Blue Book's lack of clinical

foundation to support admissions were confirmed by Lead Plaintiff's investigation and have also

been the subject of at least one qui tam action.

98. Tenet disclosed that for many conditions that are common among Medicare

patients, the Blue Book includes admission justification criteria that (1) bear little relevance to

determining the severity of a patient's condition; (2) are at odds with standard clinical decision-

making for determining the proper level of care for patient and (3) provide an improper clinical

basis for admitting a patient into the hospital.

99. The following examples, which were also analyzed and revealed in the Tenet

Litigation, highlight the improper admission criteria as compared to objective clinical factors

utilized by InterQual.

(i) Chest Pain

100. Upon information and belief, the Blue Book contains Admission Justifications

that are either inappropriate or not relevant for physicians to consider in determining whether it

is medically necessary to admit a chest pain patient to the hospital or whether the patient should

be treated in observation. According to CW #3, if someone came into the ER complaining of

chest pain, they were admitted. CW #3 added that "normally you would observe, monitor and do

tests. Admitting everyone with chest pain is not the right thing to do. You want a doctor to

make the decision not the company." CW #3 who participated in daily meetings with

Haywood's CEO, Jeremy Gray, recalled discussing which patients would be discharged based

solely on which patients may not be approved for payment. CW #3 specifically recalls admitting

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chest pain patients if their enzyme levels were elevated at all.

101. Upon information and belief, under standard clinical practice, when a patient

presents to the hospital with chest pains, there are varying levels of care that may be provided to

the patient, depending on the severity of the patient's condition. Given that chest pain is a very

non-specific complaint, meaning that there are many causes of chest pain other than a heart

attack, patients often are initially evaluated in observation in order to determine whether or not

they are in fact having a heart attack or suffering from a lack of oxygen to the heart. Many chest

pain patients are appropriately treated in observation, where standard tests may be run to

determine whether the patient has had a heart attack, in which case the patient likely would be

admitted to the hospital, and if not, the patient would likely be discharged. Once a decision is

made to admit a patient to the hospital, there are varying levels of care in the hospital depending

on the severity of the patient's clinical condition. The initial level of care for stable patients

requiring admission is the inpatient general medicine or surgical floor setting. Those requiring a

higher level of care may be placed in a telemetry or intermediate care setting. Those patients that

are most critically ill may be placed in the critical care unit.

102. The 2009 Blue Book sets forth three levels of care, and two levels of admissions

for chest pain patients, each with separate "Admissions Justifications": 1) "Very Low Risk:

Observation or Discharge;" 2) "lower risk/telemetry (Green/Blue cases);" 3) "high and moderate

risk levels/CCU (Orange/Red cases)." As set forth below, for each of these categories of care,

the Blue Book contains admissions criteria that are both inappropriate and inconsistent with

standard clinical decision-making.

103. With respect to Chest Pain Observation, when a patient presents to the hospital

with chest pain - one of the most common presenting emergency room complaints - it is accepted


clinical practice to run two to three sets of blood tests on the patient every six to eight hours to

measure the levels of cardiac enzymes (specifically, a cardiac marker known as troponin) in the

blood. An elevated troponin level from one test to the next indicates that the patient's cardiac

wall likely has suffered a loss of blood flow, meaning that the patient is at risk of suffering or

having suffered a heart attack. If, as is often the case, the patient's troponin level does not

increase from one blood test to the next, the physician may rule out a heart attack and send the

patient home. In addition, it is standard practice to perform two electrocardiograms ("ECGs"),

which measure changes in heart rhythm that may be indicative of a heart attack-during the same

time period that the cardiac enzymes are measured.

104. Because these cardiac enzyme tests and ECGs may be completed in less than 24

hours, it is standard practice for these patients to be treated in observation, rather than admitted

to the hospital. Indeed, treating chest pain patients in observation is so common that some

hospitals have observation units dedicated solely to evaluating patients complaining of chest

pain.

105. While it is standard clinical practice to run these tests while the patient is in

observation, the Blue Book justifies placement of a patient in observation only after the patient

has two negative serial ECGs and two negative sets of cardiac enzyme tests. In other words,

under the Blue Book, these tests may be run on patients already admitted to the hospital.

106. With respect to Chest Pain Telemetry Admissions, upon information and belief,

the Blue Book Admission Justification criteria for chest pain, lower risk/ telemetry are at odds

with standard criteria used in practice and justify admissions where, under accepted practice,

patients would not be admitted, but rather placed in observation or discharged. For example, a

patient with chest pain may be admitted to the telemetry unit rather than placed in observation if


he or she merely has a general risk factor for cardiac disease (e.g., hypertension, diabetes, or

hyperlipidemia) coupled with only one of the following:

(a) New chest pain in the presence of a significant history of coronary artery disease; (b) A recent visit to the hospital with complaints of chest pain; (c) Chest pain that may be reproduced by pressing on the chest; or (d) "Atypical symptoms," such as shortness of breath, fatigue, sleeplessness and/or

anxiety.

107 These Admission Justification criteria are weighted toward admissions and are

inconsistent with accepted clinical standards for inpatient admissions, because many patients

who present with chest pain have a history of a cardiac risk factor, such as hypertension (a very

common diagnosis in the U.S. population and not necessarily indicative of a medical need for

inpatient care). Furthermore, the criteria identified in (a) through (d) above are very different

from the accepted clinical standards for hospital admission, such as having positive cardiac

enzymes. For example, the Blue Book treats a "recent visit to the hospital with chest pain" as a

criterion for admission. While it is certainly a part of a patient's history, it is not any indication

of a patient's clinical severity of illness. Upon information and belief, none of these criteria are

representative of standard clinical criteria that physicians consider when deciding whether to

admit a patient with chest pain to the hospital. Moreover, under InterQual, these Blue Book

criteria would not support the admission of a patient to the hospital.

108. With respect to Chest Pain Cardiac Care Unit ("CCU") Adni'issions, the same is

true for the Blue Book criteria for admission. The CCU is reserved for patients with the most

critical medical conditions who require intensive and rapid treatment for survival. The Blue

Book Admissions Justification criteria, however, include, on information and belief, many

diagnoses that have no bearing on the severity of the patient's existing illness, but rather, address

only the patient's medical history or conditions that are common among many chest pain patients


- conditions that should have no bearing, under standard clinical practice, on whether a patient

should be placed into the CCU rather than simply admitted to the general medical floor. For

example, the Blue Book Admission Justification criteria for admission to the CCU include

several criteria, two or more of which must be met to justify an admission to the CCU. Several

of these criteria, upon information and belief, are out of line with standard clinical decision-

making, including the following:

(a) A history of smoking, hypertension, hyperlipidemia, or diabetes; (b) Two or more episodes of pain; (c) Oxygen saturation less than 90; (d) Rest angina less than 20 minutes (resolved with rest or nitrates); and (e) Indeterminant CKIVIB or Troponin.

109. Upon information and belief, each of these criteria is not relevant to the

determination of whether care in the CCU is medically necessary. For example, whether a

patient is a smoker or has hypertension, for example, has no bearing on the severity of the

patient's condition and certainly does not inform the need for CCU admission. Further, upon

information and belief, chest pain patients frequently present with two or more episodes of pain,

meaning that this criteria is not indicative of the severity of a patient's chest pain necessary to

require the highest level of care. In addition, having a patient with an oxygen saturation less than

90 is extremely common, not in and of itself life threatening, and easily treatable with

supplemental oxygen. When a short period of rest angina iccurs and is resolved with rest or

nitrate therapy, there is no medical necessity of treating such patients in an intensive care setting,

which is reserved for the most critically ill patients. And whether the results of a patient's

CKMB or troponin levels are "indeterminant" is not, under standard clinical practice, a

justification for admitting the patient into the CCU, but rather, an indication that further testing

should be performed.


110. In sum, in many cases where the Blue Book criteria inappropriately warrant a

hospital admission for a chest pain patient, current accepted clinical practice standards justify

placing the patient in observation status. In the case where patients present with chest pain, the

standard of care through an electrocardiogram and cardiac enzyme blood testing may be used to

determine whether or not a patient may be having a heart attack. If so, then patients may then be

admitted to the appropriate inpatient setting and appropriate level of care intensity. Patients that

are ruled out for an acute heart attack, as the vast majority of "chest pain" patients are, maybe

discharged home.

(ii) Syncope or Pre-Syncope

111. In addition to Chest Pain, the Blue Book's Admissions Justifications include

many criteria that are inappropriate for determining whether a patient with pre-syncope or

syncope (dizziness or fainting) should be admitted to the hospital or should instead be treated in

observation.

112. Under standard clinical practice, when a patient presents to the hospital

complaining of dizziness (pre-syncope) or fainting (syncope), the physician performs several

tests to eliminate any critical causes that may be responsible for these episodes, such as the

potential for a heart attack, a stroke in the brain, or some form of structural heart disease or acute

heart arrhythmia. These tests are standard 'in most hospital settings and can be performed within

a 24-hour period. Such patients typically are placed in observation so that these critical, though

rare, causes of syncope may be ruled out. Once they have been, syncope or pre-syncope is often

due to dehydration (as determined by measuring a patient's drop in blood pressure between lying

down and standing up) or by a vasovagal reaction (a very common cause of fainting in adults).

Both of these etiologies are much less critical and can be treated simply in observation. Patients


with dehydration will be rehydrated during their observation stay through IV fluids, and, as long

as the syncope does not recur, will be sent home. Patients with vasovagal episodes will follow

up with their primary care physician as an outpatient, with further treatment if the episodes recur.

Regardless, these patients typically are treated in observation.

113. Rather than treat these patients on an outpatient basis, the Blue Book Admission

Justification criteria call for the admission of a patient who has an episode of fainting and is over

the age of 60. Upon information and belief, age is irrelevant in the case of syncope. Regardless

of the etiology, age is not a risk factor for syncope, and all patients, regardless of age, will

undergo the same workup and battery of testing discussed in the previous paragraph, which are

appropriately conducted in observation. Additionally, the Blue Book admissions criteria include

patients who have a "Postural BP greater than 15 mm," indicating that patients found to have a

positive "orthostatic testing" (such as a drop in BP of greater than 15mm Hg between a standing

and sitting position) may be admitted. However, such a blood pressure drop may be due to

dehydration, which is something easily treated in an observation status with intravenous ("IV")

fluids and rehydration. Once again, this criterion is not a clinically accepted standard of care for

determining whether it is medically necessary to admit a patient to the hospital.

114. In comparing InterQual to the Blue Book, InterQual states that the criteria for

observation are, as described above, pre-syncope or syncope of unknown etiology. Upon

information and belief, this is appropriate and consistent with accepted standards of clinical care.

Further, once a patient is found to have a more critical cause of syncope, such as structural heart

disease or an arrhythmia, InterQual indicates that it is reasonable to admit such patients to the

hospital, but the majority of patients are simply dehydrated, treated with IV fluids in observation,

and discharged home.

12499 / CMP / 001 13578.DOCX v5} 38 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1463

(iii) Community Acquired Pneumonia ("CAP")

115. The next example of where the Blue Book justifies patient admission, but the

standard accepted practice does not, involves Community Acquired Pneumonia ("CAP"). On

information and belief, the Blue Book's Admission Justifications criteria ignore accepted clinical

practices for determining whether a patient presenting with CAP is ill enough to require inpatient

treatment, or whether the patient could, instead, appropriately be treated in observation.

116. Admission of a patient with CAP is justified under the Blue Book if the patient

presents with a cough and rales (the presence of fluid in the lungs). However, on information

and belief, many patients who have pneumonia - regardless of severity - have the presence of a

cough and rales on exam. Thus, the mere existence of these findings tells the physician nothing

about whether a patient presenting with a cough and rales has a clinical picture that correlates

with severity of illness requiring admission to the hospital.

117. Similarly, an admission of a patient with CAP is justified under the Blue Book if

the patient presents with a cough and infiltrate or atelectasis. On information and belief, the

mere existence of a cough and abnormal chest X-ray is only relevant to informing the physician

that the patient may have CAP; standing alone, the presence of these findings provides

information on a possible diagnosis, but does not justify hospital admission. Clinical

presentatipn, a critical component of the decision-making process regarding admission or

observation, is not taken into account in the Blue Book.

118. Under InterQual, patients presenting with a cough and rales or an abnormal chest

X-ray would not, absent other symptoms, be admitted to the hospital for treatment. Instead, such

patients would be examined to determine whether they have an elevated breathing rate, a fever,

or a high white blood cell count, and most importantly, whether the patient is 65 or older. In the


absence of serious additional criteria (for example, a breathing rate above 29), the patient would

be treated in observation with IV antibiotics and monitored for up to 24 hours for improvement.

In the typical case where the patient responded favorably to such treatment, the patient would be

sent home, and if the condition worsened, the patient would be admitted to the hospital.

119. Finally, the Blue Book permits the admission of a CAP patient who presents with

a cough and a temperature of 102 degrees with a white blood cell count of 15,000 or greater. On

information and belief, it is well accepted, however, that a patient's temperature and white blood

cell count do not necessarily have a strong correlation with the severity of disease without

consideration of age and presence of co-morbidities. Thus, absent other factors (such as

advanced age or a disease that weakens a patient's immune system), there is no absolute clinical

basis for inpatient admission when a pneumonia patient has an elevated temperature and white

blood cell count.

(iv) Cellulitis

120. On information and belief, the Blue Book's Admission Justification criteria also

are deficient when applied to patients presenting with signs of cellulitis, an infection of the skin

that can cause pain, fever, and elevated white-blood-cell counts. For example, a patient

presenting with a possible cellulitis and either an elevated white blood cell count and a

temperature over 102 degrees, or a "weeping wound," may be admitted to the hospital. On

information and belief, these admission criteria fall outside accepted clinical practice as they

individually do not provide evidence as to the severity of a patient's cellulitis. A patient

presenting with only these conditions would not, under TnterQual, be admitted to the hospital.

On information and belief, such patients would either be effectively treated with IV antibiotics in

observation for 24 hours and discharged when their condition improved, as cellulitis often does


with 24 hours of antibiotic treatment, or would be given one dose of IV antibiotics in the

emergency room and sent home with antibiotics by mouth and a follow up appointment soon

after the ER visit.

121. The Blue Book Admission Justification criteria ignore the important inquiry

regarding complexity and severity of cellulitis, a question that doctors often face when

determining whether a patient may be treated in observation or admitted to the hospital for

treatment, and the length of time that would be required to treat a cellulitis patient with IV

antibiotics. On information and belief, this determination is driven by the part of the body that is

affected (cellulitis of the face, hand, or foot is more difficult to treat than the upper arm, thigh, or

calf); co-existing medical conditions of the patient (patients with diabetes face greater risk

associated with cellulitis, often supporting inpatient treatment); and signs of sepsis or shock

(patients with low blood pressure, acute confusion, or bacteria in the blood are at the highest risk

for complications). These widely accepted clinical factors are primary considerations under the

InterQual admissions criteria, but under the Blue Book, less clinically relevant factors are

considered to justify inpatient admissions.

122. In sum, CHS ignored Medicare rules by creating a liberal and over-simplified set

of ER admissions criteria and enforcing admissions practices that steer its physicians to

inappropriately admit patients on an inpatient basis rather than observation status, and disregard

the clinically-based standard of dispensing only "reasonable and necessary" or "medically

necessary" care. Accordingly, a patient who visits a CHS hospital was much more likely to be

admitted into the hospital than if the same patient visited any other hospital that admits, as is

proper only on the basis of clinical need.

(2499/CMP/00113578DOCX v51 41 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1466

b. The Qui Tam Action Contained Substantially Similar Allegations

123 On January 7, 2009, the Qui Tam Action was filed under seal in the Northern

District of Indiana. The Qui Tam Action was subsequently unsealed on December 27, 2010, but

was not disclosed by CHS until after Tenet filed its complaint in April 2011. The Qui Tam

Action contains substantially similar allegations to those contained herein and in the Tenet

Litigation regarding CHS's use of the Blue Book to improperly boost its ER admissions.

124. Specifically, the Relator Nancy Reuille (the "Relator") in the Qui Tam Action was

a former Supervisor of Case Management who worked at Lutheran Hospital of Indiana

("Lutheran") from 1985-2008. The Relator alleged, under oath, that prior to CHS's acquisition

of Triad, Lutheran, then a Triad hospital, was proactively auditing its inpatient short stays and

was writing off Medicare reimbursements averaging $50,000 or more per month for admissions

that should have been observations. The Relator's suit further alleges that after CHS acquired

Triad, CHS "abruptly" halted these reimbursements because they constituted "a monetary loss

CHS would not permit," and proceeded to impose "questionable medical criteria [CHS] devised

and [is] different than that established by Medicare, i.e. Blue Book v. InterQual criteria."

125. The Relator also alleged that immediately after CHS acquired Lutheran, there had

been "a dramatic decrease in the volume of '23 Hour Observation' cases" and a dramatic

increase in the number of "inpatient" one-day hospitalizations.

126. The Relator further alleged that when CHS acquired Lutheran, Bill McCray

(CHS's Case Management supervisor), told the Relator that "CHS has an intense focus on case

management and that they would all require education on CHS medical criteria contained in the

corporation's "Blue Book." The Relator also alleged that she found the Blue Book

"exceptionally simplistic and nonspecific." She further alleged that "according to the Blue Book

(2499 / CMP / 001 13578.DOCX v5) 42 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1467

virtually any case could be construed as meeting "inpatient" medical criteria to detriment of the

federal government."

127. Thus, similar to the allegations here, the Qui Tam Action alleges that CHS, as part

of its scheme, was using the Blue Book to boost its "one-day stays" for Medicare patients at

Lutheran Hospital in order to increase its revenues. At no time did CHS or any of its senior

officers disclose to its investors that it was engaging in such improper, and potentially illegal,

practices.

2. CHS and its Senior Leadership Rigged Pro-MED To Drive Improper Inpatient Admissions From Its ED

128

CHS' s culture of improperly driving up inpatient admissions rates for financial

rather than clinical reasons is further demonstrated by its programming of Pro-MED to prompt

medically unnecessary testing to raise patient acuity levels. Pro-MED is used by CHS to track a

patient from the moment they enter the ER, and, as acknowledged in the Company's Form 10-

Ks, to assist physicians in making diagnoses and determining treatments. Specifically, when a

patient presents to a CHS hospital ED, the patient's information, including medical symptoms,

are entered into Pro-MED by the ED medical staff. Based on these inputs, Pro-MED will alert

the ED physician and staff to conduct particular tests or provide particular treatment to the

patient based on the patient's symptoms.

129. CHS mandated that Pro-MED be installed in every ED, including the 50 hospitals

that CHS acquired from Triad in July 2007. CW #1 explained that the Revenue Committee

decided to boost ED admissions by: (1) dispatching a half dozen "clinical documentation

specialists" to each CHS hospital to train the ER doctors and nurses how to write their orders in

patient charts to justify admissions; and (2) making programming adjustments to the Pro-MED

Software in order to generate more tests based on a patient's initial diagnosis, even though


medically unnecessary, which would result in raising a patient's "acuity level" in order to justify

an admission.

130. CW #1 recalled that the "documentation specialists" taught the staff the correct

"verbiage" to use on the "T sheets" (which are handwritten medical records), and in electronic

formats, to prompt admissions and to survive a possible audit by the CHS compliance

department or by outside auditors.

131. CW #1, who was CHS's Charge Master Manager, explained that, based on a

patient's initial diagnosis, Pro-MED ordered a certain panel of diagnostic tests, such as MRI

scans, CT scans, blood tests, and other tests. CW #1 explained that the ER staff at each CHS

hospital were required to follow Pro-MED's orders.

132. CW #1 revealed that, at the direction of her managers, she made "adjustments" to

CHS 's "Charge Description Masters" in order to generate a more comprehensive battery of

medically unnecessary tests to generate higher billings and to increase the potential that Pro-

MED would prompt an admission of a patient.

133. In addition to the "adjustments" that resulted in more diagnostic testing, CW #1

programmed Pro-MED, at the direction of senior CHS executives, to raise the "acuity levels" of

its ER patients in order to justify admissions.

134. CHS ' s senior executives orchestrated this scheme from its headquartrs. CW #1

occasionally attended the weekly meetings held by CHS ' s Revenue Committee where her

supervisor, Plattner, and senior executives discussed strategies to boost admissions and to reduce

the less lucrative observations. CW #1 recounted that, at these meetings, the Company's senior

executives discussed what changes could be made to Pro-MED in order to boost admissions and

reduce observation periods. CW #1 would then make the changes to Pro-MED, i.e., modifying


patient testing and procedures in order to raise acuity levels and prompt admissions for patients

who otherwise would not qualify for admission.

135. In particular, CW #1 recalls being approached by Defendant Larry Cash (CHS's

Chief Financial Officer) from time to time about how CW #1 could change Pro-MED to increase

the "census" (i.e., occupancy rate) at specific CHS hospitals. Modifying Pro-MED to boost

admissions was also discussed at other Company meetings. CW #1 participated in monthly

conference calls with a larger group of hospital financial officers, nursing directors, health

information management directors and others from CHS's hospitals and EDs. These monthly

conference calls were organized by CW #1 and regularly recorded by Premiere, an outside

vendor that would prepare CDs and/or transcripts of the calls and return them to CW #1. Shortly

thereafter, CW #1 would send copies of the CD's or transcripts to hospital staff. One of the

purposes of these conference calls was to discuss Pro-MED and strategies to increase admission

revenue.

136. CW #1 recalls one male patient that presented to the ER of the Woodward

Regional Hospital in Woodward, Oklahoma with a nose bleed in September, 2008. This patient

was treated, given medication, and held in observation status. Although his chart showed that his

pain was subsiding and that he had no reactions to the medication, CHS changed his acuity status

to "level 5" and admitted the patient into the Woodward's intensivç,care unit ("ICU"), instead of

discharging him.

137. CW #1 was also responsible for the training of ER staff at CHS hospitals in the

use of the correct codes for the Pro-MED system. In particular, CW #1 was responsible for

training CHS employees about CHS policies and procedures for billing Medicare and other

insurers for the services CHS rendered.


138. CW #1 further explained that the changes to Pro-MED and specific training of ER

staff were accomplished in a manner that was intended to escape detection. CW #1 recalled

CHS's executives asking whether the changes made to Pro-MED would "survive an audit." CW

#1 further stated that CHS ' s senior executives "saw a way to make more money and they took it

to Wayne Smith for approval."

139. The information provided by CW #1 was substantially corroborated by another

confidential witness. According to CW #3, the Pro-MED software system used in the ER

assigned a score to each test or procedure, or number values for each action taken. CW #3

indicated that a printout was generated which showed the "level" of illness for each patient,

which included five levels - 1 through 5. Level 5 patients were admitted or transferred to

another CHS hospital. Level 4 patients "were a gray area." Level 3 or lower patients were

normally discharged. CW #3 stated that whether a Level 4 or 5 patient was admitted was

"sticky" because if a particular patient's problem was resolved in the ED, there would be no

reason to admit them. However, CW #3 stated that in most cases CHS "admitted [them]

anyway."

140. CW #3 further stated that CHS provided nurses "with little notes on how to bump

the levels up." By administering more tests, the Pro-MED system was programmed to bump up

the patient acuity levels making it more likely that he patient would be admitted.

141. CW #4 confirmed that Pro-MED probably prompted an increase in admissions at

the hospital and that Pro-MED made some doctors "nervous." CW #4 recalls one physician, Dr.

Kaye Evans, questioning the automatic orders for some diagnostic tests and the prompting of

admissions issued by Pro-MED.

142. As further alleged by Tenet, as the patient is treated, Pro-MED was also


programmed to raise flags that require some form of treatment or testing by the physician before

the flag may be removed. On information and belief, Pro-MED often raised a flag despite there

being little or no clinical need for the physician to provide treatment required to remove the flag,

which generated substantial revenue for the CHS hospital. Although, on information and belief,

Pro-MED did not require that a physician perform a particular test on a patient, Pro-MED would

raise flags to identify when a patient has a symptom that requires some type of treatment or test

result before the flag may be removed. Importantly, it was CHS's policy that a patient should

not be discharged from the ED when one or more flags remained for a patient. While physicians

could "check off" certain of the flags, some could not be removed. Thus, even if the ED

physician believed that a patient should be discharged notwithstanding an ongoing symptom

(because the physician independently concluded that there was a clinical reason to override

CHS's non-clinical interpretation of the symptom in Pro-MED), under CHS policy, the patient

should be admitted to the hospital, rather than discharged. Although the physician could still

send the patient home, he or she did so knowing that CHS tracks the number of patients each

physician discharges with flags-even, if, according to standard clinical practice, sending the

patient home is the right thing to do. On information and belief, if an ED physician continued

sending patients home with (non-clinical) flags, the CHS hospital would request that the

company providing the ED doctors, to the CHS hospital replace such an ED physician with a

physician more willing to follow CHS policy and admit patients with CHS-derived flags.

143. While Defendants publicly touted CHS's ability to boost ED admissions rates

through the standardized use of the Pro-MED system and, in particular, at the newly-acquired

Triad hospitals, they failed to disclose throughout the Class Period that ED admissions growth

had been achieved in large part through use of the Blue Book's non-standard criteria and the fact


that Pro-MED was programmed to steer physicians and case managers to testing and treatments

that were not medically necessary, in order raise patient acuity levels to justify patient

admissions.

3. CHS's Quotas and Financial Incentives, Along with its Enforcement Mechanisms, Ensured that CHS Personnel Met Admissions Targets

144. In addition to utilizing the Blue Book and rigging the Pro-MED system to

improperly drive up admissions at its hospitals, CHS adopted a strategy of setting admissions

targets for its hospitals, incentivizing hospital administrators to meet admissions targets, and

holding its medical staff accountable to those admission targets.

145. According to a CW #3, who was an ED Director, CHS had a goal of achieving a

20% admission rate in the ED. Specifically, as part of CW #3's responsibilities, she attended

daily meetings with Jeremy Gray, the CEO of Haywood Park and other employees of that

hospital facility. At those meetings, the CEO regularly issued a directive stating that he wanted a

20% admission rate from the emergency room. CW #3 believes this "directive" originated from

CHS's corporate office.

146. According to CW #3, CHS's "quota" was very difficult to meet because the ER

only saw about 20 patients per day. In addition, CW #3 said that CHS was "very numbers

focused and the [quota] was a pain to deal with." CW #3 added that "the nurses used to joke

'should we put a sign outside saying free beer to get patients in the ER."

147. CW #3 also revealed that CHS gave admission staffers "prizes and bonuses" to

those who collected the money from ED patients. CW #3 added that, although she did not

receive a bonus, CHS case managers were eligible for bonuses.

148. CW #2 also confirmed CHS's employees incentive program. CW #2 stated that

Regional Managers and Hospital Supervisors received bonuses based on the percentage of


Medicare patients admitted and how much revenue they brought in. CW #2 explained that CHS

wanted Medicare admissions and "if you didn't produce you were done."

149. Another former employee, referred to herein as Confidential Witness #9 ("CW

#9"), worked as a Finance Manager and as an Assistant Chief Financial Officer for three CHS

hospitals (Phoenixville, PA Hospital, Chestnut Hill, PA Hospital and Brandywine Hospital

located in Coatesville, PA) from 2002-2006, and was responsible for implementing productivity

systems and benchmarking programs to boost hospital admissions at each of these hospitals. On

information and belief, CW #9 reported to the hospital CFO and participated in weekly

conference calls with Division Director Gary Link, in which each CHS hospital reported their

financial results, including "census", revenues, and budget goals. CW #9 stated that "CHS tried

to manage their inpatient admissions through their Emergency Departments." CW #9 further

stated that CHS pushed ED doctors at the hospitals where he worked to admit patients, rather

than keep them in observation status.

150. As another example of CHS's "admit at all costs" strategy and measures it took to

enforce quotas, in at least one hospital, CHS criticized its staff when it learned of ED transfers to

non-CHS hospitals, even when it was determined that CHS's ED did not have adequate

resources to treat the most critical patients. According to CW #8 a former Director of

Eijiergency Services, who was responsible for all ED operations at Western, the CEO at that

hospital would question the ED staff decisions to "transfer any patients." CW #8 stated that

Western's CEO told CW #8 that he was "catching heat from corporate" and that "[t]here was

corporate pressure on him to keep these patients in the hospital. . . .And [corporate] did not want

to see valuable dollars go out the door." CW #8 stated that this facility's ED saw a high degree

of traumatic injuries and not enough beds or medical staff to treat them all which made transfers


necessary. Despite this, CW #8 explained that the CEO still criticized the transfers by having

"temper tantrums" and stating that "corporate doesn't like the fact that we are transferring all

these patients."

151. Tenet also alleged that CHS employed similar financial incentives and

enforcement mechanisms. Tenet revealed that CHS set targets for each of its hospitals to convert

ED patients into admitted patients. These targets, which typically are posted in plain view

throughout the hospital (in the lunch room, for example), are based not on the medical needs of a

hospital's patients or, critically, the patient mix of a particular hospital, but on an artificial goal

meant to increase each hospital's admission rate. Tenet also revealed one example that

illustrates the impact of CHS ' s scheme. At Mat-Su Regional Medical Center - a former Triad

hospital - the admission rate for many years had been approximately in the 9 to 10 percent range.

Notwithstanding the relatively young population in the immediate vicinity - meaning fewer

elderly patients who are more likely to require an appropriate admission to the hospital. CHS

management set an admission target at Mat-Su of 12 to 15 percent, and expected the hospital's

ED doctors to meet that goal. With this improper emphasis on increased inpatient admissions

(and restricting outpatient status), Tenet disclosed that that in the year following CHS 'S

acquisition of Mat-Su, the hospital's observation rate plummeted from 10.01 % to 2.83% -a

stunning 72% one-year drop.

152. Tenet's investigation also revealed that CHS physicians and ED doctors also

received bonuses based, in part, "on the number of patients admitted to the hospital part of

CHS's goal of converting between 17 and 20 percent of all ED visits to inpatients." By

establishing these artificial targets, CHS ignored that patients should be admitted to the hospital

from the ED based on their clinical indications and needs, and not based on maximizing profits.


153. Defendants failed to disclose to investors that CHS established a "quota system"

at its EDs, a practice which if revealed, would have drastically altered its reputation in the

industry, as well as the value of the Company's stock.

154. In order to further its scheme, CHS regularly tracked each ED physician's

individual admissions rates and scrutinized the conduct of ED physicians who failed to meet

CHS ' s admission targets. CW #9, stated that the admission practices of the ER doctors in the

emergency department were tracked by the hospital's CEO. CW #9 indicated further that if an

ER doctor appeared to be admitting too few patients compared with his colleagues, the CEO

would arrange a meeting with the under-performing physician to discuss his or her low

admission rate. CW #9 stated that there was "definitely pressure to make your budget goals to

make sure they weren't leaving money on the table." Even more astounding, CW #9 recalled

that the CEO and the Emergency Department Director would "pull the patient's records and see

if there were any issues and why the doctor failed to admit."

155. CW #4 confirmed that at Payson hospital there was "pressure to admit patients to

increase the 'census' [CHS's occupancy rate]." In addition, CW #4 revealed that the CEO of

Payson, Chris Wolf, "would talk to the ER physicians and nurses about the need to increase

admissions to improve the census."

156. As Tenet alleged, this system created a culture in which ED physicians were

persuaded by CHS to admit patients whose medical conditions did not require inpatient care.

Further, Tenet revealed that a former CHS senior executive "regularly instructed individual CHS

hospital CEOs, at quarterly orientation and annual CEO meetings, that physicians at CHS

hospitals were required to use the Blue Book to achieve higher inpatient conversion rates in CHS

EDs and to avoid the use of observation status." Tenet also alleged that physicians were

{2499 I CMP/ 00113578.DOCX v5} 51 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1476

terminated for failing to meet the admission targets.

157. Tenet also revealed that, taking it one step further, in order to comply with the ED

admissions "quota" system in place at CHS, hospital administrators would "frequently reverse

physician decisions to place patients in observation status." As an example, Tenet noted that at

DeTar Healthcare System in Victoria, Texas-a former Triad hospital, the hospital's CEO,

William R. Blanchard, made clear to hospital staff, doctors, and case managers that it was

essential to adhere to CHS ' s policy of admitting patients to the hospital, rather than placing them

in observation status, because the hospital would earn substantially more revenue for inpatient

treatment. On information and belief, during the 2008 and 2009 time frame, the DeTar executive

staff held daily "flash" meetings during which the staff would present to Blanchard, among other

things, patients who had recently been placed into observation status. Upon learning this

information, Blanchard would, during the flash meeting, call the physician who placed the

patient into observation status and instruct the physician that the patient should be removed from

observation and admitted to the hospital. Unsurprisingly, in the year following CHS's

acquisition of DeTar, the observation rate at DeTar plummeted by over 47%.

158. In sum, by setting lofty admission targets, tracking ED physician admission rates,

rewarding or punishing ED physicians and staff based on their compliance with artificial targets,

and, in some cases, reversing the decision by ED physicians to place patients in observation

status rather than admitting them as inpatients, CHS management created a unique culture in

which patients were admitted to the hospital despite no medical need for inpatient treatment.

D. CHS's Admission Rates Diverge Dramatically From its Competitors

159. The foregoing strategies demonstrate how CHS actively worked to systematically

drive up inpatient admissions and drive down outpatient observation admissions. When CHS's


observation and admission rates are compared to the industry in general and to well-known

hospital operators that compete with CHS, the success of CHS ' s improper practices becomes

readily apparent.

160. Tenet initially retained two "leading" healthcare consulting firms, including

Avalere Health LLC ("Avalere") to study how CHS's observation and admission rates compared

to other well-known hospital systems. Avalere analyzed publically available data from CMS

while Tenet's other consultant analyzed data from the American Hospital Directory. Both Tenet

consultants reached "substantially similar conclusions." Lead Plaintiff subsequently hired its

own industry specialist who has analyzed the CMS database and independently confirmed the

conclusion of Tenet's experts.

161. Specifically, statistical analyses performed by Tenet's consulting firms revealed

that in 2009, CHS 'S outpatient observation rate was less than half the industry average. In fact,

nearly 95 percent of CHS ' s hospitals had outpatient observation rates below the national average,

with nearly 70 percent of CHS ' s hospitals more than 50 percent below the national average.

162. CHS's failure to treat patients on an outpatient observation basis is particularly

surprising because, according to industry data revealed by Tenet, CHS' s patients generally

present with less severe symptoms, or lower acuity, than the national average. Specifically, on

information and belief, the average CHS hospital has a lower case mix index ("CMI") (CMIof

1.28) than the national average inpatient short-stay acute care hospital (CMI of 1.43). Hospitals

with lower CMI are expected to have a higher rate of outpatient observations, but CHS has a

below-average outpatient observation admission rate and a below-average CMI. CHS's low

outpatient observation rate, despite its lower acuity patients, evidences CHS' s improper

admissions practices.


E. Lead Plaintiff's Statistical Evidence Shows That CHS's Strategies Were Extremely Effective and Resulted in Admission and Observation Rates That Diverged Dramatically From Its Competitors

163. The findings of Lead Plaintiff's healthcare consultant are substantially consistent

with those of Avalere' s as follows:

1. CHS's Observation Rate vs. Industry

164. Tenet alleged that CHS's Medicare observation rate was "less than half the

industry average" in 2009 and that more than 90% of CHS's hospital fell below that national

average. Lead Plaintiff's healthcare industry specialist's analysis is consistent with this finding.

As shown below, CHS 's Medicare observation rate in 2009 was 60% below the national

average.

CHS Hospital ED Observation Rates

Are Below National Average 20%

18%

16% Over 93% (117/125) of CHS

14% ____ Hospitals are below the national

average for % of ER visits with National Average

12% observation (2009) 86%

8%

CHS Average 6% 3.4%

4%

2%

0% Each bar represents a CHS

2499 / CMP / 001 13578.DOCX v5) 54 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1479

165. The analyses performed by Lead Plaintiff's healthcare industry specialist

demonstrate system-wide differences in performance between CHS and its industry peers that

cannot be attributed to a few outlier hospitals that skew the averages. Rather, the findings show

that 93%, or 117 out of 125 CHS hospitals, were below the national average for the percentage

of ER visits with observation.

2. CHS's Observation Rate vs. Average of High Oualitv Systems

166. Tenet's expert found that CHS's Medicare observation rate in 2009 was

"significantly below the rates at some of the most highly respected not-for-profit hospitals in the

country."

167. Lead Plaintiffs healthcare industry specialist's analysis is consistent with this

finding. As shown below, CHS's 2009 Medicare average observation rate is 55% to 83% below

the averages of High Quality Systems: 6

High Quality Systems included the following: the Cleveland Clinic, Stanford, Texas Health Resources, the Mayo Clinic, Baylor, and the University of Michigan.

{2499/CMP100113578.DOCX v51 55 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1480

CHS Hospital ED Observation Rates

Are Below the Averages of High Quality Systems

12%

10%

8%

6%

4%

2%

0%

Most CHS Hospitals are below

the average % of ED visits with

observation in high quality

hospitals and systems.

UofM Stanford

19.3% 1 20.6%

Baylor

Cleveland clinic

Mayo 10.0% ILL

frii

Texas Health Resources

7.5%

CHS

Average

bar represents a CHS hospital

3. CHS's Observation Rate vs. Rural Hospitals in Same Geographic Area

168. Tenet alleged that CHS's "rural hospital base" could not explain the low Medicare

observation rate in 2009 relative to the industry. Tenet's data showed that CHS' s Medicare

observation rate of 4.89%, was significantly lower than other rural hospitals in the same

geographic area. Again, Lead Plaintiff's healthcare industry specialist's analysis is consistent

with this finding. As shown below, the Medicare observation rate in 2009 at CHS hospitals was

far below other rural hospitals in 20 out of 20 states in which they operate:


The ED Observation Rate at Cl-IS Hospitals is Below the Rural Average in Their

Respective States

IL V. TX x

'1 [ tLHI -4%

Li

-4%

CHS ED observation rate is below

Vie verge for nonCHS midl

hospitd!s in 20 of the 20 states

thdt CHS operates in (2009).

Each bar, rprasarit5 CHS rwaL a pamtions i rt a single state

Disproportionate Share of CHS's Admissions are "One-Day Stays"

169 Tenet alleged that, as result of CHS's improper admissions of patients who should

have been observed, CHS has a "higher than average percentage of admitted patients who are

discharged after just a single day in the hospital - a metric that Medicare considers a red flag for

patients who may not have required treatment on an inpatient admitted status."

170. Lead Plaintiff's healthcare industry specialist analyzed CHS's admission of

patients with "one-day stays" as compared to the national average. Hospitals with a high rate of

short "one-day stays" are considered "red flags." Its analysis found that nearly 70 percent of

CHS hospitals admitted ER patients for one-day stays at an average rate of 32% higher than the


national average:

The Percentage of ER Admits w/ 1 Day LOS at CHS

Hospitals Is Above the National Average 70% .............................-

60%

50%

40%

30%

National Average

20% 13.0%

::

Nearly 70% (87/125) of CHS

Hospitals are 32% above the

national average for % of ER admits

with a 1 day stay (2009)

CHS Average 17.1%

Each bar represents a CHS hospital

171. The testing performed by Lead Plaintiff's healthcare industry specialist not only

confirms much of the analysis conducted by Tenet's consultants, but also establishes substantial

differences in admissions and observation rates at CHS and comparison groups of hospitals over

an extended time period.

172. For example, Lead Plaintiff's expert's analysis of data for the three year period

from 2008-2010 revealed that CHS hospitals' have an average for ER visits with observation was

58% lower than the average rate for large systems and 77% below the average observation rate

for quality hospital systems for this time period. Conversely, hospitals average ER admission

rate of during this three year period was also 25% higher than the average admission rates for

quality systems and 22% higher than larger systems.


173. These statistical analyses and evaluation of CHS's business practice leads to the

inescapable conclusion that patients whose medical needs likely required treatment in outpatient

observation status were systematically admitted for higher-paying inpatient care at CHS

hospitals.

F. CHS's Medicare Manipulation Enhanced the Company's Growth by Ac quisition Strategy

174. CHS multiplied the effects of its Medicare billing manipulation to its maximum

benefit through its strategy of acquiring hospitals and increasing revenue from these hospitals by

immediately lowering their outpatient observation admission rates and increasing their inpatient

admission rates through manipulative admission practices.

175. As disclosed by Tenet, CHS's growth-through-acquisition strategy is best

illustrated through its July 2007 acquisition of Triad, which operated approximately 50 hospitals

in 17 states. As noted above, immediately following the acquisition, former Triad hospitals were

required to adopt CHS's non-standard Blue Book criteria for patient admissions and employ the

Pro-MED system. The immediate impact of CHS's Blue Book practices and use of Pro-MED to

generate a battery of medically unnecessary tests on Triad hospital admission rates was stunning:

within one year of the acquisition, the outpatient observation rate at the former Triad hospitals

dropped 52 percent, while the admission rate jumped by about 33 percent. This dramatic swing

was due in large part to CHS ' s practice of improperly admitting patients on an inpatient basis

who, under Triad's pre-acquisition admissions criteria, would have been appropriately treated on

an outpatient observation basis.

176. CHS ' s practice of inflating its revenues grew increasingly risky in recent years.

Since 2007, the U.S. Department of Justice (the "DOJ") has announced at least four

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multimillion-dollar settlements with hospital proprietors for improperly billing outpatient

observation admissions as inpatient admissions. This enhanced scrutiny of improper hospital

billing also has been driven by CMS, which recently expanded its use of Recovery Audit

Contractors or "RACs," who are paid a contingency fee to identify improper Medicare billings

by hospitals.

G. CHS's Improper Admissions Practices Significantly Inflated its Revenues

177. CHS billed Medicare for excess sums by deceptively driving up inpatient

admissions at its facilities. Tenet claimed that CHS receives on average $3,500, more per patient

admitted on an inpatient basis than for patients admitted on an outpatient observation basis.

178. Tenet's expert estimated that as a direct result of CHS ' s improper practices, CHS

impropeily billed Medicare and received up to $306 million during 2006-2009, and up to $345

million during 2003-2009.

179. CHS's windfall from Medicare payments likely represents only one component of

the total benefits that CHS has received through billing for unnecessary services. In 2010, CHS

received only 27.2 percent of its revenue from Medicare. Upon information and belief, CHS's

improper admission guidelines have also resulted in the billing of private payers and state

Medicare and Medicaid programs for unnecessary inpatient admissions.

H. CHS's Admission Rates Steadily Decline After It Discontinues Use Of The Blue Book

180. After Tenet exposed CHS's practice of improperly driving up admissions and

overbilling Medicare, the Company acknowledged that it had decided to discontinue using the

Blue Book and move to InterQual.

181. Over the next several quarters, as CHS further reduced and ceased using the Blue


Book's criteria, CHS's reported observation rates increased while its admission rates and "one-

day stays" substantially decreased. Specifically, the rate of same-store inpatient admissions

substantially decreased by 3.4% in Qi 2011; by 5.6% in 2Q 2011; by 7.0% in 3Q 2011, and by

6.7% in 4Q 2011. For the full year 2011, the decline in the rate of inpatient admissions more

than doubled to 5.6% from 2.5% in 2010.

182. On October 27, 2011, during CHS's 3Q 2011 earnings call, CEO Smith and CFO

Cash acknowledged that "soft inpatient volumes continued in the third quarter" and attributed the

7.0% admissions decline in part to "[r]eduction in one day medical admissions," noting that

"chest pain admissions accounted for 40% of the decline."

183. When questioned about the impact of switching InterQual, CEO Smith

acknowledged that "[s]ome of this, by the way, you when you break it down has to do with just

the movement from inpatient to outpatient." On the same call, CFO Cash acknowledged an

admissions "drop throughout the company" with ER admissions a "little higher percentage."

I. Additional Facts Supporting a Strong Inference of Scienter

184. Numerous facts support a strong inference that CHS and its senior executives

Smith and Cash knew or recklessly disregarded that their public statements to investors were

materially false and misleading. First, Smith and Cash emphasized that standardizing and

centralizing CHS operations initiatives "encompass nearly every aspect of our business" and

were "a key element in improving our operating results." CHS highlighted in its SEC filings that

each hospital management team is "supported by our centralized, operational, reimbursement,

regulatory and compliance expertise, as well as by our senior management team, which has an

average of over 25 years of experience in the healthcare industry."

185. CHS's top-down approach to implementing its operations initiatives included


training programs for all senior hospital management, chief nursing officers, quality directors,

physicians, case managers and other clinical staff. As CEO Smith boasted in CHS's 2010

earnings release, that, "we can provide the experienced operating expertise with a proven track

record... in each of the communities we serve."

186. Second, since patient admissions, particularly in the ER, were a primary driver of

the Company's revenues, senior management were intimately involved in crafting and

monitoring these Company-wide practices which were critical to CHS ' s successful business

model. CHS emphasized in its Form 10-Ks and other public statements that because 55% to

60% of hospital admissions originated in the ER, "we systematically take steps to increase

patient flow in our ER as a means of optimizing utilization rates for our hospitals." These steps

included (1) the Blue Book's unique non-industry admissions justifications criteria; (2)

programming the Pro-MED system used in all ERs to prompt medically unnecessary testing in

order to raise acuity levels to justify patient admissions and (3) the use of incentive programs and

quotas to achieve higher admissions levels.

187. CHS's ER admission performance was monitored at the Division and Board

levels. In its Form 10-Ks, CHS represented that it paid particular attention to case management

issues such as patient treatment, patient length of stay and utilization of resources. Witnesses

also confirm senior management's oversight and direction through the Revenue Committee

which held regular weekly meetings with CHS executives and administrators to discuss topics

such as (1) implementation of the Blue Book and Pro-MED, (2) whether ED admission targets

were being met, (3) whether observation rates could be lowered, and (4) whether CHS hospitals

were staying under their respective Medicare and self-pay length-of-stay goals. These meetings

evidence CHS 's corporate culture of increasing admissions at all costs.

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188. Cash's participation at these Revenue Committee meetings and discussions with

former employees, support an inference that he directed and/or approved the improper admission

strategies. For example, CW #1 stated that Cash occasionally attended the Revenue Committee

meetings where the Blue Book and Pro-MED were discussed, and, on at least one occasion, Cash

asked her how CHS could program Pro-MED to convert "level 2s" to "level 4s" in order to

increase the "census", i.e., admissions at specific CHS hospitals. CW #1 also stated senior

management "saw a way to make money and took it to Wayne Smith for approval." These

allegations support a strong inference that CHS ' s scheme was orchestrated at the highest levels

of the Company.

189. The fact that employees, such as CW #1, were directed by superiors to modify

Pro-MED to prompt testing which lacked medical necessity in order to raise patient acuity levels,

and to avoid detection, is strong evidence that senior management knew that these strategies

were improper and intended to conceal them.

190. Further, the fact that Smith and Cash directed and/or approved of programming

Pro-MED to prompt testing that was medically unnecessary, so as to drive up patient acuity

levels, in order to justify patient admissions rather than observations status, supports a strong

inference of knowledge or recklessness in failing to disclose these key facts when touting the

successful use of Pro-MED to increase ER admission levels, particularly in newly acquired Ip

hospitals such as Triad.

191. Further, as described above, witnesses confirmed that Carolyn Lipp, a senior CHS

executive who was responsible for overseeing the development, implementation and use of the

Blue Book at CHS hospitals, reported directly to Smith, and in that capacity, attended regular

meetings with Smith on the topic of the Blue Book. Given the importance of ER admissions to

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CHS' s financial success and that Medicare and Medicaid funded a large percentage of those

admissions based upon the Blue Book's criteria, a strong inference can be drawn that the

aggressive non-standard criteria used to justify those admissions standards were being promoted

at the highest corporate levels. It is simply implausible, therefore, that Smith and Cash were

unaware that the Blue Book was being used at CHS's hospitals to drive inappropriate admissions

when he and Cash made numerous public statements touting CHS business strategies and

performance, including the successful integration and synergies achieved at newly acquired

hospitals through improved ER operations.

192. A strong inference can be drawn that defendants Smith and Cash knew of CHS's

improper admissions criteria for years given that the Blue Book was designed to ensure that the

Company could overbill Medicare for medical services which, in turn, inflated CHS's revenues.

Because Medicare services were one of the Company's chief sources of income, knowledge of

Medicare's regulations was intrinsic to CHS's business model. Accordingly, there is a strong

inference that Defendants knew or recklessly disregarded the fact that CHS' s consistent growth

and successful financial performance, purported "synergies" and "operating efficiencies" (as

detailed in Section J, infra), were largely predicated on improper admissions practices that

violated Medicare's rules.

193. Defendants Smith's and Cash's statements show thatthey knew or recklessly

disregarded that CHS engaged in improperly aggressive admissions practices leading to an

abundance of one-day stays. During CHS's Q2 2008 earnings call, Defendant Cash stated:

"[O]ne thing's happened as we had pretty good growth with ER admissions which generally are

a little bit less acuity business. So while we've got very good admissions growth, it is a little bit

less acuity." Smith then stated:


One of the things that's maybe driving some of our volume is that we've had an - we've been working hard on these emergency rooms, and increased our emergency room admissions of over 3%, and we are getting a little less acuity in terms of those, and that would be expected when you start really pushing them and working to improve your emergency services.

(Emphasis added).

194. Thus, Defendants acknowledged that CHS was driving up its admission rates for

lower acuity patients - precisely those patients who are likely to be discharged in a day and in

many instances should not have been admitted as inpatients in the first place.

195. When CHS's conduct was exposed by Tenet at the end of Class Period, the

Individual Defendants attempted to temper the market's response by making false and

misleading statements which included contradicting their prior representations. For example

while acknowledging during a May 2, 2011 Deutsche Bank Healthcare Conference call that CHS

had recently decided to move from the Blue Book to InterQual, Cash denied that there were

significant distinctions between the Blue Book and TnterQual, but rather claimed InterQual was

"fairly close to our current Blue Book criteria". Cash asserted during the same call that he did

not believe that "rapid changes" would need to be done as CHS transitioned to InterQual,

because, as CHS asserted during an April 28, 2011 conference, the Blue Book was based on

"current clinical practice."

196. However, Defendants' statement regprding the similarities between, and ease of

transition from, the Blue Book to InterQual, is belied by the comparative analysis of the two

systems initially performed by Tenet, as set forth in 11160-162, and by the steady decline in

"same-store inpatient admission" experienced by CHS hospitals once they switched to

InterQual' s admission criteria, as set forth in 11180-183. Indeed Cash acknowledged during an

April 28, 2011 conference call that as a result of CHS moving from the Blue Book to InterQual,


"we're seeing some [financial] effect now".

197. Accordingly, the foregoing facts support a strong inference that Smith and Cash

knew or recklessly disregarded that the higher admission rates during the Class Period were due

to the Company-wide use of the Blue Book's improper admissions justifications.

198. Similarly, during a April 28, 2011 conference call, in an obvious attempt to

discredit the claims made by Tenet and temper the market, CHS denied that Pro-MED was used

as a tool to increase admissions:

[T]he system does not contain admission or observation criteria from any source. This system does not order tests. This system does not make any recommendation to physicians to admit patients, place patients in observation or discharge patients...

199. Likewise, during a Bank of America Merrill Lynch Health Care Conference on

May 10, 2011, Cash claimed that Pro-MED "doesn't change [sic] to admit or put into

observation or anything of that nature. It's simply a tracking system."

200. Defendants took precisely the opposite position CHS took during the Class

Period. For example, Smith represented at the J.P. Morgan Healthcare Conference on January

13, 2009, that "our admission rate is up about 4% in our emergency rooms" due to the

installation of the Pro-MED system in the ER at Triad hospitals. Similarly, Smith emphasized

that Pro-MED has not only "improve[d] the level of service, but improv[ed] the level of number

of admissions that come through our emergency department" (Lehman Brothers Global

HealthCare Conference March 18, 2008); and that through Pro-MED, "we beg[in] to see

increases in terms of admissions rates through, particularly the Triad facilities, similar to what

we had in the legacy CHS facilities." (Credit Suisse Health Care Conference Nov. 12, 2008).

201. CHS also made several communications to selected analysts and investors in an

attempt to prop up CHS ' s fallen market price in response to Tenet's revelations. This conduct


violated Regulation FD which requires that issuers immediately make fair disclosure to the

public of any material information that it has intentionally disclosed to only a select group. 7

202. Specifically, CHS 's management held private discussions with selected investors

and securities analysts in which CHS management shared material nonpublic information

regarding the issues raised in the Tenet Litigation. For example:

a. A Susquehanna analyst report dated April 13, 2011 refers to "a quick check with [CHS] management yesterday afternoon," during which the analyst learned detailed, material information about CHS' s operations. Specifically, CHS management purportedly shared figures relating to one-day stays and represented that "there are no arrangements provided by [CHS] facilities."

b. A Susquehanna analyst report dated April 12, 2011 refers several times to a "conversation last night" with CHS. Specifically, CHS management provided "an alternative case that could be consistent with the lower level of observations combined with normal inpatient admissions being in line with its industry peers."

A Wells Fargo analyst report dated April 11, 2011 refers to "key takeaways" - learned directly from a conversation "[1]ate Monday afternoon" the analyst had with Larry Cash, convened when "management reached out to a number of investors and sell-side analysts"-about (i) CHS's planned conversion away from the Blue Book and InterQual and (ii) CHS's ED admission rate.

d. Private, conversations also were referenced in the Oppenheimer analyst report dated April 13, 2011 and the UBS analyst report dated April 13, 2011.

e. These and other analyst reports observe that CHS management shared preliminary thoughts on the Tenet Litigation with select investors and analysts, before sharing the same information with the market generally. For example, Susquehanna's April 12 Ih report states: "[CHS] offered some preliminary thoughts in a conyersation last night and promised to provide a more complete rebuttal within the next week."

203. CHS ' s senior management's private conversations with analysts and investors are

further evidence of their willingness to break SEC disclosure rules in order to influence CHS' s

Regulation FD provides that "[w]henever an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer or its securities to [one group of investors], the issuer shall make public disclosure of that information . . . [s]imultanously, in the case of an intentional disclosure; and [p]romptly, in the case of a non-intentional disclosure." 17 C.F.R. § 243.100(a).


market price.

204. Finally, only after Tenet exposed CHS's improper practices, did the Company

belatedly disclose numerous government investigations, lawsuits and shareholder inquiries

relating to these same admission and billing practices. These events included:

(1) the receipt of a subpoena on March 31, 2011 from the U.S. Department of

Health and Human Services and OIG, "in connection with an investigation of

possible improper claims submitted to Medicare and Medicaid";

(2) an investigation commenced by the Office of the Attorney General of the

State of Texas on November 15, 2010 concerning the ED procedures and

billing for CHS's 18 Texas hospitals which accounted for 15% of the

Company's revenues;

(3) the November 2010 receipt of a letter from a shareholder group CtW

Investment Group, alerting CHS of issues similar to allegations in the Tenet

Litigation; and

(4) contact by the DOJ regarding a whistleblower complaint concerning improper

Medicare billing which was unsealed in December 2010.

205

The foregoing facts support a strong inference that Defendants' failure to

disclose: (1) CHS's improper admissions practices; (2) CHS's manipulated admission rates; and cp

(3) the effect of that manipulation on CHS ' s financial performance, was knowing or in reckless

disregard of the truth.

206. CHS' s knowledge is also attributable through other executive including Plattner,

Carlton and Newsome, as described herein. In September 2008, Newsome, who held senior

management positions at CHS as the President of both Division II and, later, Division ifi, left

f 249 / CMP/ 00113578.DOCX v5} 68 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1493

CHS to become the Chief Executive Officer of Health Management Associates, Inc. ("HMA").

CHS and HMA are now both targets of government investigations and defendants in civil

litigation alleging they were engaged in similar admissions misconduct that overbilled Medicare.

This is a function of their common leadership through Newsome, who held a top management

position at CHS, and reported directly Smith and Cash, as well as the Board, through September

2008. These facts support an inference of scienter at the highest levels at CHS.

207. Under Newsome' s leadership, HMA has been the subject of at least two lawsuits

concerning HMA' s improper patient admissions practices and/or the failure to disclose such

practices to investors. First, a retired agent for the Federal Bureau of Investigation, who worked

at HMA as the Director of Compliance and has 30 years of experience investigating Medicare

fraud as a supervisor of healthcare fraud unit in Miami, filed a whistleblower suit on October 21,

2011 against HMA 8 pursuant to in Florida's Private Sector Whistle Blower's Act, alleging that

HMA terminated his employment for uncovering widespread fraudulent billing of Medicare,

specifically that HMA was inappropriately admitting patients, rather than placing them in

observation, "who clearly did not meet the standards for inpatient admission." Second, in a suit

alleging substantial similar allegations to those alleged by Lead Plaintiff herein, HMA and

Newsome were sued in the U.S. District Court for the Middle District of Florida on February 2,

2012,9 where the plaintiff alleged HMA, which also used Pro-MED and Newsome violated

federal securities laws by failing to disclose HIVIA' s improper admissions and fraudulent

Medicare billing practices relating to improper admissions practices.

Insider Trading

208. Additional evidence of scienter is shown through the Individual Defendants'

Meyer v. Health Mgmt. Associates, Inc., Case No. 11-25334 (17th Jud. Dist. Broward County, Fla.). Norfolk County Retirement Sys. v. Health Management Associates, Inc., 12-cv-0228 (M.D. Fla.).

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personal stock sales. Smith and Cash sold substantial amounts of their CHS shareholdings

before and during the Class Period, while in possession of material information about CHS '5

scheme to boost its hospital admissions that gave a misleading picture of the Company's

operations, synergies, and successful financing performance. In total, Smith and Cash reaped a

total of approximately $33,840,061 in proceeds from Class Period sales, as indicated on the

tables at 1148 and 50, supra.

J. Defendants' Additional Material Misstatements And Omissions During The Class Period

209. During the Class Period, CHS and senior executives Smith and Cash made

numerous materially false and/or misleading statements about CHS' s operating efficiencies,

growth strategies and admissions gains. What Defendants failed to disclose was that for more

than a decade, CHS had engaged in a systematic scheme to improperly boost its inpatient

admissions through the use and implementation of, inter alia, the Blue Book, Pro-MED and

company incentives and quotas at CHS ' s existing facilities and newly acquired hospitals. These

practices had the consequence of improperly increasing CHS ' s Medicare reimbursement

revenues, by admitting patients who required outpatient observation only. CHS failed to disclose

this information even after various government agencies had commenced investigations and at

least one shareholder group notified CHS of substantially similar allegations as those contained

in this Complaint.

Second Quarter 2006

210. On July 26, 2006, CHS issued a release announcing its financial results for the

second quarter ended June 30, 2006 (the "Q2 2006 Earnings Release"). The Company reported

net operating revenues of $1.061 billion, a 15.5 percent increase compared to $918.7 million for


the same period of the prior year. The Company further reported a net income of $52.4 million,

or $0.54 diluted earnings per share for the quarter, compared to $40.5 million, or $0.43 diluted

earnings per share in the same period of the prior year. CHS also reported, on a same-store

basis, admissions growth of 1.1% and adjusted admissions growth of 0.5%, when compared to

the same period of the prior year.

211. Commenting on the results, CEO Smith stated: "[CHS] delivered another very

strong financial and operating performance for the second quarter of 2006. These results reflect

consistent execution of our centralized and standardized operating strategy, the successful

integration of recently acquired Izospitals and our continued focus on quality care." (Emphasis

added).

212

CEO Smith also addressed CHS's acquisition of several hospitals during the

quarter:

Our acquisition pace has been exceptionally strong through the first half of 2006. As we have continued to acquire new facilities and assimilate them into our system, we have realized greater operating efficiencies while improving volumes and revenues. At the same time, we have created an opportunity to capture healthcare services that were previously sent out of the local market. Our proven ability to deliver improved results and foster positive community relations has continued to be a distinct competitive advantage for Community Health Systems. We will continue to look for opportunities to selectively acquire new hospitals.

(Emphasis added).

213. The foregoing representations in 11211-212, supra, were materially false and

misleading because CHS failed to disclose that its success in executing its centralized and

standardized operating strategy, its success as an acquirer, its operational performance and its

operating efficiencies were dependent in large part upon CHS's undisclosed and unsustainable

admissions practices, as discussed in detail above.


214. On July 28, 2006, the Company filed its quarterly report for the second quarter

with the SEC on a Form 10-Q, which was signed by Smith and Cash (the "Q2 2006 Form 10-

Q"). The Q2 2006 Form 10-Q reiterated the previously announced financial results. In addition,

pursuant to the Sarbanes-Oxley Act of 2002 ("SOX"), the Q2 2006 Form 10-Q included

certifications by Smith and Cash, stating that the Q2 2006 Form 10-Q "d[id] not contain any

untrue statement of a material fact or omit to state a material fact necessary to make the

statements made... not misleading..."

215. On July 27, 2006 CHS held a Q2 earnings conference call. On the call, Smith

engaged in this question and answer:

Your all's experience, are you guys doing anything now to improve these hospitals than you have done differently? Is there anything you're working on as a first priority with doctors or services that may be helping to enhance some of these things? It just seems like it has picked up a little bit more in the last couple of years.

A: Wayne Smith: Yes, our model really has not changed, and our methodology really has not changed all that much in terms of the way we look at new facilities. We work hard on the expense side the first year and try to figure out everything we can to improve the expenses, and everything from staffing to getting them in - our standard - all of these things we standardize and centralize and start working on our plan for recruiting physicians and develop a plan in terms of physician need. That works.

That has been working pretty well for us, so we really have not changed anything dramatically. We might be getting a little better at doing that. We've done it now so many times. We bought about 50 facilities over the last nine or 10 years. But surely we are beginning to perfect that a little bit. But having said that, no, there is no new silver bullets that we have. It is just the basic blocking and tackling over and over again.

(Emphasis added).

216. The foregoing representations in 11214-215, were materially false and misleading

because CHS failed to disclose that its financial growth and inpatient admissions were driven in

large part by CHS' s implementation of the improper strategies as detailed above, in order to


improperly increase overall hospital inpatient admissions. Further, these statements were

materially false and/or misleading because CHS failed to disclose that its success through

acquisitions was in large part dependent upon CHS 's implementation of its admissions practices

at these newly acquired hospitals to navigate patients into inpatient treatment despite the absence

of a clinical basis for these patients to be admitted into the hospital.

Third Quarter 2006

217. On October 25, 2006, CHS issued a release announcing its financial results for the

third quarter ended September 30, 2006 (the "Q3 2006 Earnings Release"). CHS reported net

operating revenues of $1.123 billion, a 20.9 percent increase compared to $929.3 million for the

same period of the prior year. The Company further reported a net income of $48.2 million, or

$0.51 diluted earnings per share for the quarter, compared to $42.9 million, or $0.46 diluted

earnings per share for the same period of the prior year. CHS also reported a 16.9% increase in

total inpatient admissions and a 2.6% increase in same-store admissions compared to the same

period of the prior year.

218. Commenting on the results, CEO Smith stated:

Community Health Systems continued to demonstrate solid execution in a challenging environment during the third quarter of 2006. The year-over-year gain in revenues and higher patient volumes on a same-store basis reflect the benefits of our proven centralized operating strategy and the assimilation of recently acquired hospitals. We have continued to pursue our growth strategy through a combination of market share opportunities and acquisitions. Since the beginning of 2006, we have acquired new hospitals at an aggressive pace with six new hospitals added to our portfolio. We believe Community Health Systems has a strong base of assets with opportunities for additional growth, and we remain very enthusiastic about our prospects for the remainder of 2006.

(Emphasis added).

219. On October 27, 2006, the Company filed its quarterly report for the third quarter


and nine months ended September 30, 2006 with the SEC on a Form 10-Q, which was signed by

CEO Smith and CFO Cash (the "Q3 2006 Form 10-Q"). The Q3 2006 Form 10-Q reiterated the

previously announced financial statements and further stated:

Our financial results for the three and nine months ended September 30, 2006, reflect our continued growth in volumes and revenues and reflect our capacity to improve the level and scope of services and ... our ability to improve operating efficiencies.

(Emphasis added).

220. On October 26, 2006 CHS held a Q3 2006 earnings conference call. On the call,

CEO Smith touted CHS's performance:

Community Health Systems continues to demonstrate solid execution in this challenging environment during the third quarter 2006. Same-store year-over-year gain in patient volume and revenue and cost management reflect our centralized operating platform and successful integration of our acquired hospitals.

(Emphasis added).


misleading because CHS failed to disclose that its "centralized operating platform" and gains in

ER inpatient rates, improved operating efficiencies, and the successful integrations of its newly

acquired hospitals were driven in large part by CHS ' s implementation of the improper strategies

as detailed above, in order to increase hospital inpatient admissions by utilizing an improper and

unsustainable strategy.

Fourth Quarter and Full Year 2006

222. CFO Cash, speaking at a Credit Suisse Boston Healthcare Conference on

November 15, 2006 about CHS's ER growth opportunities stated as follows:

The second big strategy was the ER. We came in the company in 1997, we had about 2% to 11% of the ER visit became and inpatient as a result to adding

{2499 / CMP /001 13578.DOCX vS} 74 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1499

specialists and adding services and a better management [sic]. We now get about 14% to 15%. With a standard marketing program in all our markets, there is still one marketing program we think just on the hospital side you see your results from. Each hospital has a - Promed system in all our hospitals to let us arrange the endocrine management and also make sure all are covered, services are rendered.

(Emphasis added).

223. The foregoing representation was materially false and misleading because

Defendant Cash failed to disclose that CHS ' s dramatic ED admissions increase was attributable

in large part to CHS implementing its improper and unsustainable operating strategies, as

detailed above, that were designed to drive patients into short, one-day stay inpatient treatment

despite the lack of a medical basis for these patients to be admitted into the hospital.

224. On February 15, 2007, the Company issued a release announcing its financial

results for the fourth quarter ended December 31, 2006 (the "Q4 2006 Earnings Release"). The

Company reported net operating revenues of $ 1.154 billion, a 17.6 percent increase compared to

$982.1 million for the same period of the prior year. The Company further reported a net income

of $53.6 million, or $0.57 diluted earnings per share for the quarter, compared to $48.1 million,

or $0.51 diluted earnings per share in the same period of the prior year. CHS also reported a

15.7% increase in total admissions and a 3.2% gain in same-store admissions compared to the

same period of the prior year.

225. CEO Smith commenting on the results, stated:

Our fourth quarter performance marked a solid finish to another good year for Community Health Systems. We posted record revenues of $4.4 billion in 2006, a 17 percent gain over the prior year, reflecting strong volume growth across our network of hospitals throughout the country. Our same store growth metrics are another important measure of our success in 2006 and these favorable trends demonstrate consistent execution of our operating strategy.

(Emphasis added).


226. In the Q4 2006 Earnings Release, CEO Smith continued:

We further extended our market reach in 2006 with the acquisition of eight hospitals. Community Health Systems has continued to pursue an aggressive acquisition strategy with a proven track record for finding suitable hospitals and successfully assimilating these facilities into our system.

(Emphasis added).

227. On February 20, 2007, the Company filed its 2006 annual report on Form 10-K,

which was signed by Smith and Cash (the "2006 Form 10-K"). The 2006 Form 10-K reiterated

the previously released financial statements. In addition, pursuant to SOX, the 2006 Form 10-K

included certifications by Smith and Cash, stating that the 2006 Form 10-K "d[id] not contain

any untrue statement of a material fact or omit to state a material fact necessary to make the

statements made ... not misleading ..."

228. The 2006 Form 10-K addressed, inter alia, CHS' "Business Strategy" to

"Increase Revenue at [CHS] Facilities", including "Emergency Room Initiatives":

Given that over 60% of our hospital admissions originate in the emergency room, we systematically take steps to increase patient flow in our emergency rooms as a means of optimizing utilization rates for our hospitals.

One component of upgrading our emergency rooms is the implementation of specialized computer software programs designed to assist physicians in making diagnoses and determining treatments. The software also benefits patients and hospital personnel by assisting in proper documentation of patient records and tracking patient flow. It enables our nurses to provide more consistent patient care and provides clear instructions to patients at time of discharge to help them better understand their treatments.

(Emphasis added).


misleading because CHS failed to disclose that its "proven track record" and gains in ER

inpatient rates and improved operating efficiencies were driven in part by its implementation of

the Blue Book at CHS ' s legacy hospitals as well as its newly acquired hospitals, in order to


increase hospital inpatient admissions by utilizing an improper and unsustainable operating

strategy. CHS also failed to disclose that the Pro-MED software that assisted physicians in

making diagnoses was rigged in such a way as to drive ED inpatient hospital admissions higher

by prompting testing that was clinically unnecessary in order to raise patient acuity levels and,

thereby, "justify" improper admissions.

230. The 2006 Form 10-K also addressed CHS's compliance with government

regulations and standards:

The healthcare industry is required to comply with extensive government regulation at the federal, state, and local levels. Under these regulations, hospitals must meet requirements to be certified as hospitals and qualified to participate in government programs, including the Medicare and Medicaid programs. These requirements relate to the adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, hospital use, rate-setting, compliance with building codes, and environmental protection laws. There are also extensive regulations governing a hospital's participation in these government programs.... We believe that our hospitals are in substantial compliance with current federal, state, and local regulations and standards.

(Emphasis added).

231. CHS also included a description of its quality assurance programs in the 2006

Form 10-K:

We have implemented various programs to ensure continuous improvement in the quality of care provided. We have developed training programs for all senior hospital management, chief nursing officers, quality directors, physicians and othr clinical staff. We share information among our hospital management to implement best practices and assist in complying with regulatory requirements....

Each of our hospitals is governed by a board of trustees, which includes members of the hospital's medical staff. The board of trustees establishes policies concerning the hospital's medical, professional, and ethical practices, monitors these practices, and is responsible for ensuring that these practices conform to legally required standards. We maintain quality assurance programs to support and monitor quality of care standard and to meet Medicare and Medicaid accreditation and regulatory requirements. Patient care evaluations and other quality of care assessment activities are reviewed and monitored continuously.

12499 I CMP I 001 13578.DOCX v51 77 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1502

(Emphasis added).

232. In the 2006 Form 10-K, CHS explained that it continually monitored and updated

its compliance programs:

Since its initial adoption, the compliance program continues to be expanded and developed to meet the industry's expectations and our needs. Specific written policies, procedures, training and educational materials and programs, as well as auditing and monitoring activities have been prepared and implemented to address the functional and operational aspects of our business. Included within these functional areas are materials and activities for business sub-units, including laboratory, radiology, pharmacy, emergency, surgery, observation, home health, skilled nursing, and clinics. Specific areas identified through regulatory interpretation and enforcement activities have also been addressed in our program. Claims preparation and submission, including coding, billing, and cost reports, comprise the bulk of these areas.

(Emphasis added).

233. In the 2006 Form 10-K, the Company reported that it had an ethics and

compliance program, which includes a Code of Conduct. The Company's Code of Conduct

addresses coding and billing, and states in relevant part:

Third Party Payers

Coding and Billing

All individuals responsible for coding and billing for services will adhere to all official coding and billing guidelines, rules, regulations, statutes, and laws. Colleagues are prohibited from knowingly causing or permitting false or fraudulent claims. Furthermore, colleagues shall not engage in any intentional deception or misrepresentation intended to influence any entitlement or payment under any federal health care benefit program.

CHS Code of Conduct, available at http://www.chs.net/company_overview/

code_conduct.html (Emphasis added).


because CHS failed to disclose the Company's pervasive practice of intentionally increasing the

number of inpatient admissions even when such treatment was not clinically necessary for the


purpose of triggering higher reimbursement amounts from Medicare and insurance companies.

Furthermore, the Company's systematic violations of Medicare rules, as detailed herein, belied

its repeated representations that it was in compliance with federal regulations governing the

provision of medical care. Defendants made substantially similar misstatements and omissions

during the Class Period as those contained in 11228, 230-233, in their 2007-2010 Form 10-Ks

discussing CHS's "Business Strategy", "Emergency Room Initiatives" and compliance with

federal regulations, including but not limited to Medicare. For the reasons discussed above,

these representations were also materially false and/or misleading.

First Quarter 2007

235. On April 25, 2007, the Company issued a release announcing its financial results

for the first quarter ended March 31, 2007 (the "Qi 2007 Earnings Release"). The Company

reported net operating revenues of $1.204 billion, a 17.3 percent increase compared to $1.027 for



earnings per share for the same period of the prior year. CHS also reported at 12.7% increase in

total admissions compared to the same period of the prior year. On a same-store basis,

admissions increased 1.0% and adjusted admissions increased 1.2% compared to the same period

of the prior year.

236. CEO Smith highlighted Ql 2007 results and the benefits of CHS' acquisition

strategy:

With our proven centralized operating strategy and, more importantly, disciplined cost management, we continue to manage successfully through the issues facing the industry.

12499 / CMP /001 13578.DOCX v5} 79 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1504

Our track record of assimilating new hospitals into our system with favorable results demonstrates one of the company's strengths. We are also very focused on implementing a successful integration of the Triad hospitals.

237. On April 26, 2007, the Company filed with the SEC its report on Form 10-Q for

the first quarter of 2007, which was signed by CEO Smith and CFO Cash (the "Qi 2007 Form

10-Q"). The Qi 2007 Form 10-Q "Management's Discussion and Analysis of Financial

Condition and Results of Operations" highlighted CHS' admission growth:

On a consolidated basis, total admissions increased 12.7% during the three months ended March 31, 2007 compared to the three months ended March 31, 2006. Admissions at hospitals owned throughout both periods increased 1.0% during the three months ended March 31, 2007, as compared to the same period in the prior year .... The increase in admissions continue to reflect the application of our operating strategies of growing through selective acquisitions and improving same-store hospital performance.

(Emphasis added).


misleading because CHS failed to disclose that its financial growth and inpatient admissions

gains were driven, in part, by CHS's implementation of the Blue Book and programming Pro-

MED to generate tests and procedures in the ER that were not clinically necessary, as detailed

above, in order to increase overall hospital inpatient admissions at its newly acquired hospitals

and CHS legacy hospitals. Further, these statements were materially false and misleading

because CHS failed to disclose that "one of the company's strengths," the assimilation of CHS's

newly acquired hospitals, was driven in large part by CHS's implementation of its admissions

practices at these newly acquired hospitals, designed to admit patients into the hospital despite

the absence of a clinical basis for these patients to be admitted into the hospital.

Second Quarter 2007

239. On July 30, 2007, the Company issued a release announcing its financial results


for the second quarter ended June 30, 2007 (the "Q2 2007 Earnings Release"). The Company

reported net operating revenues of $1.249 billion, a 17.7 percent increase compared to $1.061

billion for the same period of the prior year. The Company further reported a net income of

$53.8 million, or $0.57 diluted earnings per share for the quarter, compared to $52.4 million, or

$0.54 diluted earnings per share for the same period of the prior year. CHS also reported a

10.9% increase in total admissions compared to the same period of the prior year. On a same-

store basis, admissions decreased 0.2% and adjusted admissions decreased 0.4% compared to the

same period of the prior year.

240. CEO Smith touted these results in the Q2 2007 Earnings Release:

Community Health Systems delivered a solid financial and operating performance for the second quarter of 2007. These results reflect consistent execution of our centralized and standardized operating strategy and our ongoing focus on quality care. This strategy has enabled us to continue to be successful in meeting our objectives in a challenging, constantly evolving healthcare environment.

****

We are very excited about our ability to further expand our reach and geographic scope and look forward to the successful integration of the Triad operations.



Q"). In the Q2 2007 Form 10-Q CHS stated:

The increase in our consolidated admissions reflects our strategy of growing through selective acquisitions. The flat trend in same-store admissions reflects our targeted closure of certain unprofitable service offerings in specific markets and a general trend in the industry during the current period. Furthermore, although we have experienced an increase in bad debts related to self-pay business and an increase in salaries and benefits related to additional employed physicians and incremental stock based compensation, we believe that our consolidated financial results reflect our strategy and ability to increase revenue and effectively manage costs while facing difficult industry related issues such as increasing numbers of uninsured and underinsured patients.

(2499/ CMP / 001 13578.DOCX v51 81 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1506

(Emphasis Added).

242. On July 31, 2007 CHS held a Q2 2007 earnings conference call. On the

conference call, CEO Smith discussed potential growth opportunities through the recently

announced Triad acquisition:

We have spent a long period of time, trying to perfect our work in our emergency rooms as it relates to emergency room admissions. We have done a lot of good work with that. We have a lot of good systems in place. We talked about [Pro] Med all the time when we're out publicly. Triad does not have any systems and they have not done any analytical work in terms of their emergency services. And actually their admission rate is lower than ours, which historically you would think would be higher, because generally speaking, they may have hospitals that have a larger number of specialists.

(Emphasis added).


misleading because CHS failed to disclose that its financial growth, its growth through selective

acquisitions and its inpatient admissions gains were driven in part by CHS' s implementation of

the Blue Book and programming Pro-MED to generate tests and procedures in the ER that were

not clinically necessary, as detailed above, in order to increase overall hospital inpatient

admissions. CHS also failed to disclose the reasons why its ED results were higher than Triads,

i.e., as a result of CHS's ED admissions practices which were designed to place patients into

inpatient treatment without a clinical basis for doing so. Further, CHS also failed to disclose that

the planned "successful integration" of Triad would result from CHS ' s implementation of its

admissions practices at the former Triad hospitals.

Third Quarter 2007

244. On October 30, 2007, the Company issued a release announcing its financial

results for the third quarter ended September 30, 2007 (the "Q3 2007 Earnings Release"). The

Company reported net operating revenues of $2.352 billion, a 110.4 percent increase compared


to $1.118 billion for the same period of the prior year. The Company further reported a net

income of $10.5 million, or $0.11 diluted earnings per share for the quarter, compared to $8.2

million, or $0.09 diluted earnings per share for the same period of the prior year.

245. In the Q3 2007 Earnings Release CEO Smith highlighted third quarter results:

These results include the operations of Triad since the completion of the Triad acquisition on July 25, 2007. While we are pleased with the progress made in just a few short months, there is much left to be accomplished and our management team continues to work diligently to integrate the Triad hospital operations. I strongly believe that this will be a winning transaction for our shareholders.

****

Community Health Systems has a proven track record for finding suitable hospitals and successfully assimilating these facilities into our system. With the completion of the Triad acquisition, we have significantly enhanced the scope of our operations and geographic diversity. We remain focused on the key areas for success in our business - an effective centralized and standardized operating platform, effective cost management, a successful physician recruitment program and a favorable reputation in the marketplace - as we continue to move Community Health Systems forward into 2008.

(Emphasis added).

246. On November 2, 2007, the Company filed its quarterly report for the third quarter


Q"). The Q3 2007 Form 10-Q "Management's Discussion and Analysis of Financial Condition

and Results of Operations" discussed CHS's acquisition of Triad completed in July 2007:

We believe the acquisition of Triad will benefit the Company since it expanded the number of markets we serve, expanded our operations into five states where we previously did not operate, and reduced our concentration of credit risk in any one state. We also believe that synergies obtained from eliminating duplicate corporate functions and centralizing many support functions will allow us to improve Triad's margins.

247. On October 31, 2007 CHS held a Q3 2007 earnings conference call. On the call,

Cash and Smith discussed synergies and the Triad acquisition:


[Cash]: . . .And as Wayne pointed out, we've achieved approximately 12% of our targeted first-year synergies, more importantly our 2008 calendar year does include 150 million of synergies in addition to the normal growth that's expected to occur. And Wayne will now provide a brief recap.

[Smith]: .. .Well, we were pleased with the progress made with our integration of Triad in just a few months. There is still much left to accomplish; and our management teams continue to work diligently to integrate these assets. But we're definitely on the right track...


misleading because CHS failed to disclose that the expected synergies in the Triad acquisition

would be driven in large part by CHS ' s implementation of the improper and unsustainable

operating strategies that had not been previously employed at the former Triad hospitals,

including the Blue Book and programming Pro-MED to generate tests and procedures in the ER

that were not clinically necessary in order to raise acuity levels, as detailed above, in order to

increase overall hospital inpatient admissions.


249. On November 13, 2007, CEO Smith, speaking at a Credit Suisse China

Healthcare Conference, discussed the integration of Triad hospitals through CHS '5

"standardized, centralized" business strategy:

Historically, what we've done and what we will do with the Triad facilities is what we've done in the past in terms of - and which is a very simple straightforward business strategy in terms of recruiting physicians and expanding services and increasing emergency room services, and improving hospital operations. We've done this very successfully over the last number of years. I think probably we have the best track record in the industry in terms of earnings growth. So we don't see any reason why we can't continue to do that with these new facilities.

The other area that we found opportunity in historically for our hospitals has been our emergency services, and we work on our emergency services in terms of standardizing and centralizing our approach.

250. The foregoing representation was materially false and misleading because CHS

f 249 / CMP / 001 13578.DOCX v5) 84 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1509

failed to disclose that, since CEO Smith and CFO Cash arrived at CHS, the increased levels of

patients admissions at CHS hospitals were the product of CHS ' s improper admissions practices,

discussed in detail above, to steer patients into inpatient treatment despite the absence of a

clinical basis for these patients to be admitted into the hospital. Specifically, CHS failed to

disclose that CHS had engaged in an effort to increase its patient admissions through the

implementation of the improper admission practices that resulted in the admission of patients

into CHS hospitals who should have been treated in observation. CHS's reputation and track

record for consistent earnings and revenue growth were based on this same improper conduct.

251. On February 21, 2008, the Company issued a release announcing its financial

results for the fourth quarter ended December 31, 2007 (the "Q4 2007 Earnings Release"). The

Company reported net operating revenues of $2.625 billion, a 137.6% increase compared to

$1.105 billion for the same period of the prior year. In the Q4 2007 Earnings Release, the

Company reiterated that "[CHS] remains focused on the key areas for success in its business

an effective centralized and standardized operating platform, effective cost management, a

successful physician recruitment program and a favorable reputation in the marketplace."

(Emphasis added).

252. In addition, CEO Smith stated:

Our fourth quarter perfornance capped off a year of significant growth and progress for Community Health Systems. We reached an important milestone in 2007 with the completion of the Triad acquisition and we have continued to focus on the integration of the Triad facilities into our portfolio of hospitals. We intend to build on our past success as a proven operator and leverage these assets to further extend our record of growth.

(Emphasis added).


which was signed by Smith and Cash (the "2007 Form 10-K"). The Company made


substantially similar statements to those stated above in 11228, 230-233 in its 2007 Form 10-K

filed on February 29, 2008 at pp. 2-3, 5, 12-13, 19.

254. The foregoing representations in 1125 1-253, supra, were materially false and

misleading because CHS failed to disclose that the increased level of patient admissions at CHS

hospitals was due in large part to CHS ' s improper admissions practices, to steer patients into

inpatient treatment despite the absence of a clinical basis for these patients to be admitted into

the hospital, which has resulted in various regulatory investigations and the potential for

significant liability to CHS. Specifically, CHS failed to disclose that CHS had engaged in an

effort to increase its patient admissions through implementation of the improper admission

practices that resulted in the admission of patients into CHS hospitals who, under industry

standard clinical criteria, should have been treated in observation. CHS ' s purported reputation as

a successful operator and acquirer was based on this same improper conduct. Further, CHS 's

representations about the integration of Triad were materially false and misleading because CHS

failed to disclose that these same improper admission practices were the main driver of growth at

the newly acquired Triad hospitals.

First Quarter 2008

255. At a JP Morgan Chase & Co. Healthcare Conference on January 9, 2008, Smith

touted CHS '5 "stançlardized, centralized business processes and procedures... [which are at]

the heart of the organization and it continues to be and is probably the main reason that we were

able to get as far as we have as quickly as we have." Smith emphasized how important it is that

"[W]e manage our emergency rooms" using Pro-MED. Smith noted that "ProMED is a system

that provides us not only good demographic information on the patients that come to our

facilities, but also good clinical information, diagnostic information." The result is "over the


last 4 or 5 years, [CHS has] been able to increase [its] admission rate by about 10% in our

emergency rooms through the use of this Pro-Med system."

256. Similarly, at the Stanford Group Company Healthcare Conference held on

January 17, 2008, CFO Cash represented:

Also, if you looked at the ER process, it's a system we're going to put in place over the next year or so in most of the Triad hospitals, the Pro-MED system; it's helped us a lot to identify admissions to emergency room [sic] and do a very good quality job. And make sure that the appropriate care is given; so that's an activity.

(Emphasis added).

257. At the March 4, 2008 Raymond James Institutional Investors Conference Cash

highlighted the improvements to CHS made in ED, stating:

[A]lmost 60% of our admissions, legacy CHS came through the emergency room, where Triad is about 55%. We've spent probably about $140 million on 42 ER renovations. Now, you may ask why you want to do that since you get your self-paid through there. We think we get that anyway. We came to this company about 10 years ago. The admit rate through the ER was about 10%, now it's about 15%. Triad, who's actually got more physicians and more services, should have a higher admit rate through the ER; it's actually running about 14%. We have a standard marketing program we use. We also have a standard data tracking system. Pro-MED is in all our hospitals, and we've put that in the Triad hospitals.

This is an opportunity, we think, to increase the volume in both companies as we do a better job of managing the ER. We've improved our satisfaction. It's been a big contributor to same-store admissions growth. If you track the same hospitals we've owned since 2002 through 2006, we've grown our admissions by 10% coming through the ER, so it's a strength of ours to do a very good job in that area.

258. These foregoing statements in 11255-257 were materially false and misleading

because Defendants failed to disclose that CHS's success was due, in large part, to the

Company's undisclosed strategies, including the Blue Book's aggressive, non-industry standard

admissions criteria, programming Pro-MED to generate tests and procedures in the ER that were

(2499 / CMP/ 00113578.DOCX v5} 87 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1512

not clinically necessary in order to raise patient acuity levels, and a quota incentive system,

which had the cumulative effect of drastically increasing the number of one-day stays while

decreasing the observation rate.

259. On April 29, 2008, CHS issued a release announcing its financial results for the

first quarter ended March 31, 2008 (the "Qi 2008 Earnings Release"). The Company reported

net operating revenues of $2.728 billion, a 136.3 percent increase compared to $ 1.154 billion for



earnings per share for the same period of the prior year. CHS also reported a 111.1% increase in

total admissions compared to the same period of the prior year, according to CHS attributable to

the "expansion of our hospital portfolio in 2007." On a same-store basis, admissions increased

3.8% compared to the same period of the prior year.

260. In the Qi 2008 Earnings Release, CEO Smith applauded the results stating:

Community Health Systems is off to a very solid start for 2008. Our first quarter results reflect our ability to drive revenues and improve the operating per of both our existing and recently acquired facilities. In addition, the favorable admission trends are due in part to a strong flu season and the additional day during the quarter period because the current year is a leap year.

Our strategic focus for 2008 will be on pursuing growth opportunities within our existing markets. As we continue our integration efforts, we are expanding our proven business model and identifying operating synergies in order to drive improved returns on the additional assets acquired in 2007. Toward that end, we remain focused on the key areas for success in our business - an effective centralized and standardized operating platform, disciplined cost management, a successful physician recruitment program and strategic investments to ensure we have the right equipment, technologies and clinical services for our hospitals. We are very pleased with our progress to date and remain confident in our ability to extend our record of growth as we move Community Health Systems forward in 2008.

(Emphasis added).


261. The foregoing statements were materially false and misleading because CHS

failed to disclose that its admissions numbers, ER strategy, and CHS' s centralized and

standardized operating platform depended in large part on CHS's improper and unsustainable

admissions practices. In particular, CHS failed to disclose that its "ability to drive revenues," as

well as its ability to "identify[] operating synergies," was due, in large part, to the Company's

undisclosed strategies, including the Blue Book's aggressive, non-industry standard admissions

criteria, programming Pro-MED to generate tests and procedures in the ER that were not

clinically necessary in order to raise patient acuity levels, and a quota incentive system, which

had the cumulative effect of drastically increasing the number of one-day stays while decreasing

the observation rate.

262. On May 2, 2008, the Company filed its quarterly report for the first quarter with

the SEC on a Form 10-Q, which was signed by CEO Smith and CFO Cash (the "Qi 2008 Form

10-Q"). CHS discussed its revenue and volume growth this way:

For the three months ended March 31, 2008, we generated $2.728 billion in net operating revenues, a growth of 136.3% over the three months ended March 31, 2007, and $60.1 million of net income, an increase of 10.7% over the three months ended March 31, 2007. . . . The increases in net operating revenue and volume are due in part to our acquisition of the former Triad hospitals, as well as a benefit from a strong flu season.

(Emphasis added).

263. On April 30, 2008 CHS held a Qi 2008 conference call. On the call, CEO Smith

attributed CHS' inpatient admissions growth to the increase in the flu and the extra day in

February due to the leap year:

With that, I'd like to review some of the key accomplishments for the quarter. As you know, by February influenza was widespread across the country and remained a strong admission for us throughout the second week in March. Our same-store admissions, benefitting from this strong flu benefit, for the first quarter


were up 3.8%. Same-store adjusted admissions also increased 3.8% for the same quarter. Same-store net revenues increased 5.7%.

264. In the same earnings call, CFO Cash similarly stated:

Our consolidated admissions were 177,280 in the first quarter, and the consolidated adjusted admissions were 310,251. Same-store admissions increased 3.8%, and our same-store self-pay admissions as a percent of admissions increased 20 basis points.

Flu-related admissions represent approximately 120 basis points of increase, an additional day in February representing another 120 basis points.

(Emphasis added).

265. The foregoing representations in 11262-264, supra, concerning CHS's same-store

admissions increases due to the flu and the leap year were materially false and misleading

because in addition to these industry-wide factors, same-store admissions increases were driven

in part by CHS's implementation of the Company's undisclosed strategies, including the Blue

Book's aggressive, non-industry standard admissions criteria, programming Pro-MED to

generate tests and procedures in the ER that were not clinically necessary in order to raise patient

acuity levels, and a quota incentive system, which had the cumulative effect of drastically

increasing the number of one-day stays while decreasing the observation rate. In addition, the

statement in 1262, supra, was materially false and misleading because CHS failed to disclose

that its results after acquiring Triad were driven by CHS ' s implementation of its admissions

practices at the former Triad hospitals, discussed in detail above, designed to drive patients into

inpatient treatment despite the lack of a medical basis for these patients to be admitted into the

hospital.

Second Quarter 2008

266. On July 28, 2008, CHS issued a release announcing its financial results for the

second quarter ended June 30, 2008 (the "Q2 2008 Earnings Release"). The Company reported

IF


net operating revenues for the quarter of $2.691 billion, a 124.6 percent increase compared to

$1.198 billion for the same period of the prior year. CHS also reported a 101.3% increase in

total admissions compared to the same period of the prior year. On a same-store basis,

admissions increased 2.3% and adjusted admissions increased 2.4%, compared to the same

period of the prior year.

267. In the Q2 2008 Earnings Release, CEO Smith commented:

Community Health Systems delivered a solid operating performance for the second quarter of 2008. These results reflect consistent execution of our strategy and our continued progress with respect to the integration of the significant number of facilities acquired in 2007. We are pleased with the overall trends in our business during the second quarter with strong same-store growth metrics as well as efficient expense management. Our hospitals are well positioned in each of their respective markets, and are geographically diversified, which minimizes our operating risk as no one state represents a disproportionately greater percentage of our total revenues or earnings. We believe we have a business model in place that has proven, over time, to enhance the operating peiformance at both our existing and acquired facilities. This model has enabled us to continue to meet our objectives in today's hospital industry operating environment.

As we continue to integrate our recently acquired hospitals, we are focused on the further expansion of our business model to drive improved returns on these assets. We are pleased with our progress through this transition period and will continue to identify operating synergies including reduced marketing and supply costs, targeted physician recruiting, centralized managed care negotiations and a more efficient allocation of capital. We believe we have significant opportunities for continued improvement in the second half of 2008. Above all, we remain focused on delivering value to both our shareholders and the communities we serve.

(Emphasis added).


misleading because CHS failed to disclose that CHS's "business model" and its efforts to

"integrate" its newly acquired hospitals were driven, in large part, by CHS' s implementation of

improper and unsustainable operating strategies, including the Blue Book's aggressive, non-

industry standard admissions criteria, programming Pro-MED to generate tests and procedures in


the ER that were not clinically necessary in order to raise patient acuity levels, and a quota

incentive system, which had the cumulative effect of drastically increasing the number of one-

day stays while decreasing the observation rate.

269. On August 5, 2008, the Company filed its quarterly report for the second quarter

with the SEC on a Form 10-Q, which was signed by CEO Smith and CFO Cash (the "Q2 2008

Form 10-Q"). The Q2 2008 Form l0-Q reiterated the previously announced financial results.

270. On July 29, 2008 CHS held its Q2 2008 earning conference call. On the call,

Smith and Cash discussed CHS's ER admissions:

W. Larry Cash: Yeah, Darren, one thing's happened as we had pretty good growth with ER admissions which generally are a little bit less acuity business. So while we've got very good admissions growth, it is a little bit less acuity. Our patient days are down slightly, and I think our [inaudible] day was down about 5%, being two-tenths of a day....

Wayne Smith: One other thing, Darren, and just to follow up on Larry's comment about - One of the things that we thought we had a good opportunity with the Triad [inaudible] as well as improving ER admissions in our - emergency admissions are up over 3% or so. When you do that, you're clearly going to have less acuity, and that's adversely affecting our case mix to some extent.

Wayne Smith: One of the things that's maybe driving some of our volume is that we've had an - we've been working hard on these emergency rooms, and increased our emergency room admissions of over 3%, and we are getting a little less acuity in terms of those, and that would be expected when you start really pushing them and working to improve your emergency services.

(Emphasis added).


because CHS failed to disclose how it was able to achieve admissions growth through the ED,

despite the fact that less acuity patients access the ED. Specifically, CHS failed to disclose that

its inpatient admissions results through the ED were driven in large part by its implementation of

its unsustainable operating strategy designed to drive patients into inpatient admissions despite


the lack of a clinical basis to do so.

272. On the same earnings call Cash commented on CHS's year-to-date admission

growth:

Well, if you - We went into the year at 0.5 to 1.5. We had a really strong flu season, and of course that's what's [inaudible] and we've also got leap year in the first quarter. You look at the second half the year, you wouldn't want to anticipate a flu coming in the fourth quarter. . . . So we sort of went back to looking at more of where we thought was still good growth, maybe around 1% or 1.5% growth for the rest of the year, which is less than we've been for the first two quarters. Hopefully the programs we got in place will have us do better than that. We clearly are working to do better than that and we hope our hospitals do better, but that was the guidance.

273. The foregoing representation in 1272, supra, was materially false and misleading

because CHS failed to disclose that its admission growth was driven, in large part, to the

Company's implementation of undisclosed strategies, including the Blue Book's aggressive,

non-industry standard admissions criteria, programming Pro-MED to generate tests and

procedures in the ER that were not clinically necessary in order to raise patient acuity levels, and

a quota incentive system, which had the cumulative effect of drastically increasing the number of

one-day stays while decreasing the observation rate.

Third Quarter 2008

274. On October 29, 2008, CHS issued a release announcing its financial and operating

results for the third quarter ended on September 30, 2008 (tbe "Q3 2008 Earnings Release").

The company reported net operating revenues of $2.773 billion, a 23.4 percent increase

compared to $2.247 billion for the same period of the prior year. The Company further reported

a net income of $50.4 million, or $0.53 diluted earnings per share for the quarter, compared to

$10.5 million, or $0.11 diluted earnings per share for the same period of the prior year. CHS

also reported a 22.6% increase in total admissions compared to the same period of the prior year.

{2499 I CMP/ 00113578.DOCX v5} 93 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1518

On a same-store basis, admissions increased 2.3%, compared to the same period of the prior

year. CHS also discussed its recent acquisition of Empire Health Services located in Spokane,

Washington.

275. In commenting on the results, CEO Smith stated:

We continued to benefit from an improving performance at the hospital level, as evidenced by solid same-store volume gains and favorable revenue trends. These results confirm that the fundamentals of our business are strong and our centralized operating strategy is working across all of our markets. Despite a challenging macro-environment, we look forward to continued progress for the remainder of 2008 and beyond as a result of our consistent execution.

****

We were very pleased to complete the Empire acquisition on favorable terms after a lengthy negotiation and approval process. We look forward to another opportunity to expand our market reach and implement our strategy for improving operations in this health system. We believe our strong track record with respect to acquisitions demonstrates that we are well positioned to again deliver favorable results.

(Emphasis added).



Q"). The Q3 2008 Form 10-Q reiterated the previously acknowledged financial results.

277. On October 30, 2008, CHS held its Q3 2008 earnings conference call. On the

call, CEO Smith touted CHS's ability to improve margins at newly-acquired hospitals:

But the thing that differentiates us, I think, from a lot of our competitors is that we again, think we have a lot of upside potential here, and that we bought a number of hospitals that had relatively low margins, both prior to the time we did the Triad, and a number of the Triad hospitals had relatively low margins. And one thing that has happened to us over the last 12 months is that we have an outstanding group of executives that has not only stepped up and worked their way through this combination of these two gotten - taken advantage of all the synergies, but from an operating standpoint, across-the-board in our 118 facilities, our executives are performing extremely well and that's made a big difference.


(Emphasis added).


misleading because CHS failed to disclose that its financial growth was driven, in large part, by

the Company's implementation of undisclosed strategies, including the Blue Book's aggressive,




one-day stays while decreasing the observation rate. In addition, these statements were

materially false and misleading because Defendants failed to disclose that its results after

acquiring Triad were driven by CHS 's implementation of these same improper strategies.


279. On February 19, 2009, CHS issued a release announcing its financial and

operating results for the fourth quarter and year ended December 31, 2008 (the "Q4 2009

Earnings Release"). The Company reported net operating revenues of $2.762 billion, a 10.9

percent increase compared to $2.490 billion for the same period of the prior year. The Company

further reported a net income of $59.9 million, or $0.65 diluted earnings per share for the quarter,

compared to a loss of $88.3 million or $0.94 diluted earnings per share for the same period of the

prior year.

280. Touting the year end results, Smith stated:

The fourth quarter of 2008 capped off another outstanding year for Community Health Systems, Inc., highlighted by record annual revenues of over $10.8 billion....

Most importantly, we have shown our ability to deliver favorable operating results through our efforts to implement best practices in all of our facilities across the country. We have a very conservative operating strategy and are

12499/CMP/00113578.DOCX v51 95 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1520

mindful of the critical need to manage our costs and drive margin, particularly in this economic environment. We see considerable opportunities to realize additional operating synergies at our more recently acquired hospitals, including the facilities acquired in the Triad merger.

(Emphasis added).


which was signed by CEO Smith and CFO Cash (the "2008 Form 10-K"). The Company made

substantially similar statements to those stated above in 11228, 230-233 in its 2008 Form 10-K

filed on February 27, 2009 at pp. 2-3, 5-6, 12-13, 19.

282. On February 20, 2009, CEO Smith and CFO Cash presided over CHS's fourth

quarter earnings conference call. On the call, CEO Smith commented on CHS's same-store

admissions for 2008:

Let me kind of start in terms of our view of where we are in terms of same-store. We had a very strong year. Our same-store volumes were up 2%. I think it's clearly higher than anybody else in the industry even though we had a weak fourth quarter for a number of reasons. And we think the first quarter is a difficult quarter because of the fact of we had flu last year and we had a leap year.

But having said that, we're pretty confident about our 1 to 2% increase in same-store volume going forward for the year and primarily around the fact that it's sort of the basics that we continue to talk about. We only have about 50% market share. So we have a lot of our opportunity in terms of growing our markets going forward. Our case mix index is still relatively low so we have opportunity for not only volume growth but we have opportunity in terms of intensity growth.

283. On the same earnings call, CFO Cash discussed CHS's Medicare case mix on a

same-store basis:

That's the entire base of - including the Triad hospitals as best we can put together from January when we attempted to have same-store - have Triad in it from January 1 of 2007. One reason the 90 basis points was the strong flu season in our first quarter of 2009 brought case mix down. And then we've had a fair amount of success in ER management, which will sometimes bring in a little bit lower acuity admissions.


(Emphasis added).


misleading because CHS failed to disclose that its financial growth, "success in ER

management," were driven in large part, by the Company's implementation of undisclosed

strategies, including the Blue Book's aggressive, non-industry standard admissions criteria,

programming Pro-MED to generate tests and procedures in the ER that were not clinically

necessary in order to raise patient acuity levels, and a quota incentive system, which had the

cumulative effect of drastically increasing the number of one-day stays while decreasing the

observation rate. In addition, the representation in 1280, supra, that CHS implemented "best

practices at all [its] facilities" and utilized a "very conservative operating strategy" were

materially false and misleading in light of these practices. The representation in 1283, supra,

was also materially false and misleading, because CHS failed to disclose how it was able to have

"success in ER management," despite the ER bringing in lower acuity admissions.

First Quarter 2009

285. On April 23, 2009, CHS issued a release announcing its financial and operating

results for the first quarter ended March 31, 2009 (the "Qi 2009 Earnings Release"). The

Company reported net operating revenues of $2.892 billion, a 7.6 percent increase compared to

$2.689 billion for the same period of the prior year. The Company further reported a net income


or $0.63 diluted earnings per share for the same period for the year prior.

286. In the Qi 2009 Earnings Release, Smith described CHS's first quarter

performance this way:

We are pleased with our solid financial performance for the first quarter of 2009. These results reflect our proven operating strategy and our ability to drive


revenues and improve the financial performance of our hospitals in spite of a challenging operating environment. We will continue to manage our operations as efficiently as possible in this uncertain economy and, at the same time, meet our commitment to provide quality healthcare in the communities we serve.

(Emphasis added).


misleading because CHS failed to disclose that its financial growth was driven in large part, by




a quota incentive system, which had the cumulative effect of drastically increasing the number

of one-day stays while decreasing the observation rate.

288. On April 29, 2009, the Company filed its quarterly report for the first quarter with

the SEC on a Form 10-Q, which was signed by Smith and Cash (the "Qi 2009 Form 10-Q"). In

the Qi 2009 Form 10-Q, the Company stated:

Despite these uncertainties in the economy, our net operating revenue for the three months ended March 31, 2009 increased to $2.892 billion, as compared to $2.689 billion for the three months ended March 31, 2008. Income from continuing operations, before noncontrolling interests, for the three months ended March 31, 2009 increased 20.3% over the three months ended March 31, 2008. This increase during the three months ended March 31, 2009, as compared to the three months ended March 31, 2008 is due primarily to an increase in billing rates, an increase in surgeries performed at our hospitals, the realization of synergies from the Triad acquisition and the recognition of cost savings from our ability to effectively control costs.

(Emphasis added).

289. The foregoing representations in 1288, supra, were materially false and

misleading because CHS failed to disclose that its financial growth and its results after acquiring

Triad were driven by CHS implementing its improper and unsustainable admissions practices at


former Triad hospitals, as detailed above, to steer patients into inpatient treatment despite the

lack of a clinical basis for these patients to be admitted into the hospital, and that any "synergies"

CHS realized from the Triad acquisition were the result of CHS ' s implementation of these

improper and unsustainable admissions practices.

Second Quarter 2009

290. On July 30, 2009 CHS issued a release announcing its financial and operating

results for the second quarter ended June 30, 2009 (the "Q2 2009 Earnings Release"). The


$2.673 billion for the same period of the prior year. The Company further reported a net income


or $0.50 diluted earnings per share for the same period of the prior year.

291. Smith commented on the Q2 2009 results, as follows:

Community Health Systems continued to deliver a solid operating performance for the second quarter of 2009, in spite of the challenging economic environment. Our ability to drive revenues and demonstrate efficient expense management reflects consistent execution of our strategy. While the expected economic trends indicate that overall hospital industry volumes will remain under pressure for the remainder of 2009, we believe our proven operating model will favorably support our business through this uncertain environment. Our geographically diverse hospital portfolio also provides us with a competitive advantage with less exposure to more economically depressed markets.

We see considerable opportunities to realize additional operating synergies at our more recently acquired hospitals. We have demonstrated our ability to deliver improved operating results through our efforts to implement best practices in all of our facilities across the country. We have a very conservative operating strategy and are mindful of the critical need to manage our costs. With our proven track record, we are highly focused on continued improvement from our facilities with the most opportunity for growth.

(Emphasis added).

292. These statements were materially false and misleading because CHS failed to


disclose that any expected operating synergies from its newly acquired hospitals were and would

be driven in large part, by the Company's implementation of undisclosed strategies, including

the Blue Book's aggressive, non-industry standard admissions criteria, programming Pro-MED

to generate tests and procedures in the ER that were not clinically necessary in order to raise

patient acuity levels, and a quota incentive system, which had the cumulative effect of drastically

increasing the number of one-day stays while decreasing the observation rate. In addition, these

statements were materially false and misleading because in light of the fact that CHS failed to

disclose its "proven operating model" included improper and unsustainable admissions practices,

as discussed in detail above.



Q"). In the Q2 2009 Form 10-Q, CHS highlighted:

Despite these uncertainties in the economy, our net operating revenue for the three months ended June 30, 2009 increased to $3.017 billion, as compared to $2.673 billion for the three months ended June 30, 2008. Income from continuing operations, before noncontrolling interests, for the three months ended June 30, 2009 increased 34.5% over the three months ended June 30, 2008. This increase in income from continuing operations during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, is due primarily to an increase in surgeries performed at our hospitals, strong outpatient growth, the realization of synergies from our acquisition of Triad Hospitals, Inc., or Triad, and the recognition of cost savings from our ability to effectively control costs. Total admissions for the three months ended June 30, 2009 increased 5.8% compared to the three months ended June 30, 2008. This increase in admissions was due primarily to our recent acquisitions.

(Emphasis added).

294. The foregoing representations in 1293, supra, were materially false and

misleading because CHS failed to disclose that any expected operating synergies, its financial

growth and its results after acquiring Triad were in large part driven by CHS implementing its


improper and unsustainable admissions practices at former Triad hospitals, as detailed above, to

steer patients into inpatient treatment despite the absence of a clinical basis for these patients to

be admitted into the hospital, and that any synergies CHS realized from the Triad acquisition

were the result of CHS's implementation of this improper and unsustainable admissions

practices.

Third Quarter 2009

295. On October 28, 2009, CHS issued a release announcing its financial and operating

results for the third quarter and nine months ending September 30, 2009 (the "Q3 2009 Earning

Release"). The Company reported net operating revenues of $3.087 billion, a 12.1 percent

increase compared to $2.755 billion for the same period of the prior year. The Company further

reported a net income of $59.7 million, or $0.65 diluted earnings per share compared to $50.4

million or $0.53 diluted earnings per share for the same period of the prior year.

296. CEO Smith commented:

We are pleased with our solid financial and operating performance in the third quarter of 2009, as we again exceeded expectations. We continued to benefit from a consistent performance at the hospital level, as evidenced by favorable revenue trends and same-store margin expansion. These results confirm that the fundamentals of our business are strong and our centralized operating strategy is working across all of our markets.

We believe our proven ability to enhance essential healthcare services and recruit and retain qualified physicians in our markets will help support our cont,nued growth. Our conservative operating strategy has served us well, and we are mindful of the critical need to manage our costs and drive margins. We see considerable opportunities to leverage our assets and realize additional operating improvements at our more recently acquired hospitals. We are pleased with the trends in our business and we look forward to continued progress for the remainder of 2009 and into 2010.

(Emphasis added).




Q"). In the Q3 2009 Form 10-Q, CHS reiterated its opportunity for growth:

We believe there continues to be ample opportunity for growth in substantially all of our markets by decreasing the need for patients to travel outside their communities for health care services. Furthermore, we continue to benefit from synergies from the acquisition of Triad as well as our more recent acquisitions and will continue to strive to improve operating efficiencies and procedures in order to improve our profitability at all of our hospitals.

(Emphasis added).

298. The foregoing representations in 11295-297, supra, regarding synergies and

improved operating efficiencies and procedures at its newly acquired hospitals were materially

false and misleading because CHS failed to disclose that improved results were driven in large

part by CHS 's implementation of its admissions practices at these newly acquired hospitals to


be admitted into the hospital. Further, these statements attributing favorable trends in revenues

and margins to strong business fundamentals and a "centralized operating strategy" were

materially false and misleading because CHS failed to disclose that its favorable results were

also driven in large part by CHS implementing its improper and unsustainable admissions

practices and overbilling Medicare.


299. On February 17, 2010, CHS issued a release announcing its financial and

operating results for the fourth quarter ended December 31, 2009 (the "Q4 2009 Earnings

Release"). The Company reported net operating revenues of $3.1 billion, a 11.1 percent increase

compared to $2.8 billion for the same period of the prior year. The Company further reported a

net income of $65.1 million, or $0.70 diluted earnings per share for the quarter, compared to

$59.9 million, or $0.65 diluted earnings per share for the same period of the prior year.

12499 / CMP / 001 13578.DOCX v51 102 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1527

300. Commenting on the year end results, CEO Smith stated:

We are very pleased to report another successful year for Community Health Systems. Our financial and operating performance for the fourth quarter 2009 reflects our proven ability to deliver consistent quarterly results, even in the face of a challenging economy. We ended the year with record consolidated revenues of over $12.1 billion, up eleven percent over the previous year. Our results also reflect the continued success of our centralized operating strategy as evidenced by favorable annual same-store revenue growth and solid margin expansion. We have continued to focus on improving the performance at the individual hospital level in all of our markets, especially at our more recently acquired facilities.

As we look ahead to 2010, we see additional opportunities for continued growth for Community Health Systems. As a national hospital operator, our geographically diverse portfolio has always been one of our strengths, especially in an uncertain economic environment. Our hospitals have strong positions in each of their respective markets and no one state represents a disproportionate percentage of our revenues or admissions. We remain focused on the fundamentals of our business and believe our proven success in enhancing essential healthcare services, driving efficiencies, and recruiting and retaining qualified physicians in our markets will continue to support our long term growth strategies.

(Emphasis added).


misleading because CHS failed to disclose that its "centralized operating strategy," which

accounted for its financial growth and record consolidated revenues were driven, in large part, by





one-day stays while decreasing the observation rate. Further, CHS failed to disclose that in order

to improve the performance, especially at CHS ' s "more recently acquired facilities," CHS would

implement its admissions practices, discussed in detail above, designed to drive patients into

inpatient treatment despite the lack of a clinical basis for these patient to be admitted into the


hospital.


which was signed by CEO Smith and CFO Cash (the "2009 Form 10-K"). In addition, the

Company made substantially similar statements to those stated above in 11228, 230-233 in its

2009 Form 10-K filed on February 26, 2010 at pp. 1-6, 12-13, 19-20.

303. The 2009 Form 10-K also described CHS's admissions and operating results as

follows:

Net operating revenues increased by 10.9% to approximately $12.1 billion in 2009, from approximately $10.9 billion in 2008. Growth from hospitals owned throughout both periods contributed $639 million of that increase and $550 million was contributed by hospitals acquired in 2009 and 2008. On a same-store basis, net operating revenues increased 5.9%. The increase from hospitals that we owned throughout both periods was primarily attributable to higher acuity level of services provided and outpatient growth, along with rate increases and favorable payor mix. These improvements were partially offset by the stronger flu and respiratory season during the year ended December 31, 2008, as compared to the year ended December 31, 2009, and the extra day from the leap year in 2008.

On a same-store basis, inpatient admissions decreased by 1.5% during the year ended December 31, 2009. This decrease in inpatient admissions was due primarily to the strong flu and respiratory season during the year ended December 31, 2008, which did not recur during 2009, the 2008 period having one additional day because it was a leap year, and the impact of closing certain less profitable services.

304. On February 18, 2010, CHS held its Q4 2009 earnings conference call. Cash

attributed a decline in revenue to lower inpatient volume in the managed care segment.


misleading because CHS failed to disclose that, despite experiencing a decrease in overall same-

store inpatient admissions, CHS was continuing implement its undisclosed strategies, including

the Blue Book's aggressive, non-industry standard admissions criteria, programming Pro-MED

to generate tests and procedures in the ER that were not clinically necessary in order to raise

patient acuity levels, and a quota incentive system, which had the cumulative effect of drastically

12499 / CMP / 001 13578.DOCX v5) 104 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1529

increasing the number of one-day stays while decreasing the observation rate. As a result,

admissions through the ED continued to rise. For example, in a CHS Board Presentation titled

306. These foregoing representations were also materially false and misleading

because CHS failed to disclose that it was far more vulnerable than its peers to pressure from

managed care companies to shift admitted patients to observation status in light of CHS 'S

improper and unsustainable admissions practices, which resulted in CHS vastly underutilizing

observation status as compared to CHS' s peer hospital operators.

First Quarter 2010

307. On April 21, 2010, CHS issued a release announcing its financial and operating

results for the first quarter ended March 31, 2010 (the "Qi 2010 Earnings Release"). The


$2.9 billion for the same period of the prior year. The Company further reported a net income of


$0.65 diluted earnings per share for the same period of the prior year.


308. In the Qi 2010 Earnings Release, Smith acknowledged:

We are pleased with our solid financial and operating performance for the first quarter of 2010. We have continued to focus on driving operating synergies at the individual hospital level, especially at our more recently acquired facilities. Our success as an operator is supported by consistent growth in revenues and earnings, in spite of a challenging economic environment. These results confirm that the fundamentals of our business are strong and our centralized operating strategy is working across our markets.

Looking ahead, our primary focus for 2010 will be on leveraging our existing assets and improving our operations by focusing on the key areas for success in our business - a proven operating model, disciplined expense management, a successful physician recruitment program, and strategic capital investments. While we acknowledge the changing dynamics in today's healthcare marketplace, we remain confident in our ability to execute our strategy and deliver favorable results.

(Emphasis added).

309. On April 28, 2010, the Company filed its quarterly report for the first quarter with

the SEC on a Form 10-Q, which was signed by Smith and Cash (the "Qi 2010 Form 10-Q"). In

discussing the quarter's results, the Qi 2010 10-Q stated:

Our net operating revenue for the three months ended March 31, 2010 increased to approximately $3.2 billion, as compared to approximately $2.9 billion for the three months ended March 31, 2009. Income from continuing operations, before noncontrolling interests, for the three months ended March 31, 2010 increased 20.0% over the three months ended March 31, 2009. This increase in income from continuing operations during the three months ended March 31, 2010, as compared to the three months ended March 31, 2009, is due primarily to the growth in revenues from recently acquired hospitals as well as those owned throughout both periods coupled with our effective management of operating expenses. Our successful physician recruiting efforts have also been a key driver in the execution of our operating strategies. Total inpatient admissions for the three months ended March 31, 2010 increased 3.0%, compared to the three months ended March 31, 2009, and adjusted admissions for the three months ended March 31, 2010 increased 4.7%, compared to the three months ended March 31, 2009. This increase in inpatient and adjusted admissions was due primarily to acquisitions during the past twelve months.

(Emphasis added).

310. On April 22, 2010, CHS held the Ql 2010 earnings conference call. On the call,


Cash reported that same-store admissions decreased 1.2%, due in part to "reductions in one-day

stays with a corresponding increase in outpatient observations."

311. The foregoing representations in 11307-3 10, supra, were materially false and

misleading because CHS failed to disclose that it was continuing, in large part, to implement

undisclosed strategies, including the Blue Book's aggressive, non-industry standard admissions

criteria, programming Pro-MED to generate tests and procedures in the ER that were not

clinically necessary in order to raise patient acuity levels, and a quota incentive system, which

had the cumulative effect of drastically increasing the number of one-day stays while decreasing

the observation rate. As a result, despite experiencing a decrease in overall same-store

admissions due to pressure from managed care providers to reduce one-day stays, admissions

through the ED continued to rise, as set forth in 1305.

Second Quarter 2010

312. On July 28, 2010, CHS issued a release announcing its financial and operating

results for the second quarter ended June 30, 2010 (the "Q2 2010 Earnings Release"). The


$3.0 billion for the same period of the prior year. The Company further reported a net income of


$0.65 diluted earnings per share for the same period of the prior year.

313. In discussing Q2 2010 results, Smith stated:

Community Health Systems delivered another solid operating performance for the second quarter of 2010, in spite of the ongoing challenges in the economy. Our ability to continue to drive revenues and achieve solid margins demonstrates consistent execution of our centralized operating strategy and our focus on efficient expense management throughout our hospital network.

We have continued to selectively acquire new facilities that fit our operating profile. In today's economic environment, there are a growing number of


hospitals who want a proven operator to provide the resources and expertise that will enable them to deliver quality healthcare close to home. We have consistently demonstrated our ability to deliver favorable operating results through our efforts to implement best practices in all of our hospitals.

(Emphasis added).



Q"). The Q2 2010 Form 10-Q results reiterated the CHS's reported financial results.

315. On July 29, 2010, CHS held the Q2 2010 earnings conference call. Cash reported

that "same-store admissions decreased 2.5%" due in part to "a reduction in one-day admissions

with a corresponding increase in outpatient observation of 70 basis points."

316. The foregoing representations in 11312-3 15, supra, were materially false and

misleading because CHS failed to disclose that its success as an acquirer, its operational

performance and its "ability to deliver favorable operating results through [its] efforts to

implement best practices" and the "consistent execution of our centralized operating strategy"

were in large part due to the systematic implementation of improper and unsustainable

admissions practices. Specifically, the Company continued to implement its undisclosed


programming Pro-MED to generate ER tests and procedures in the ER that were not clinically



observation rate. As a result, despite a decrease in overall same-store admissions, ED

admissions continued to rise, as set forth in 1305.

Third Quarter 2010

317. On October 27, 2010, CHS issued a release announcing its financial results for the


third quarter ended September 20, 2010 (the "Q3 2010 Earnings Release"). The Company

reported net operating revenues of $3.3 billion, a 5.4 percent increase compared to $3.1 billion

for the same period of the prior year. The Company further reported a net income of $70.4

million, or $0.76 diluted earnings per share for the quarter, compared to $59.7 million, or $0.65

diluted earnings per share for the same period of the prior year.

318. In commenting on the results, CEO Smith stated:

We are pleased with our solid financial performance for the third quarter of 2010, in what has continued to be a challenging economic environment. Our conservative operating strategy and strong focus on expense management have served us well. We continued to benefit from a consistent performance at the hospital level, as evidenced by favorable same-store revenue trends for the third quarter and year to date periods.

Throughout 2010, we have continued to extend our market reach through selective acquisitions. We have identified hospital facilities that meet our operating profile with the most opportunity for growth. We have a proven track record for the successful integration of these facilities with improved operating results. With the current healthcare regulatory climate, we believe there are significant opportunities for us to pursue additional acquisitions with a greater number of independent hospitals looking for established and operationally-focused partners. We can provide the experience and financial resources to support and keep these hospitals in the local community. We look forward to working together with each new hospital partner as we deliver on our commitment to deliver quality healthcare close to home.

(Emphasis added).

319. On October 29, 2010, the Company filed its quarterly report for the second

quarter with the SEC on a Form 10-Q, which was signed by CEO Smith and CFO Cash (the "Q3

2010 Form 10-Q"). The Q3 2010 Form 10-Q reiterated the previously announced financial

results.

320. On October 28, 2010, CHS held the Q3 2010 earnings conference call. As in the

prior two quarters of 2010, Cash reported that same-store admissions decreased 3.6% in part to a

"reduction[] in one-day stays with the corresponding increase in outpatient observations."


321. The foregoing representations in 113 17-320, supra, were materially false and

misleading because CHS failed to disclose that its "proven track record for the successful

integration of" its newly acquired facilities, was driven by CHS' s implementation and execution

of its admissions practices at these newly acquired hospitals, designed to steer patients into

inpatient treatment despite the absence of a clinical basis for these patients to be admitted into

the hospital. In addition, CHS also failed to disclose that, despite experiencing a decrease in

overall same-store admission, it was continuing, to implement the Company's undisclosed


programming Pro-MED to generate ER tests and procedures in the ER that were not clinically



observation rate. As a result, admissions through the ED continued to rise.


CHS's Attempt to Takeover Tenet

322. On December 9, 2010, CHS issued a press release announcing a cash-and-stock

proposal to acquire Tenet at $6.00 per share. In the press release, which was filed with the SEC,

CHS stated, inter alia, that CHS had a "reputation for superior operating performance and a

successful track record of integrating acquisitions." CHS also stated that its "ability to enhance

the operating efficiencies and best practices of a combined organization would enable it to

provide even higher quality for patients...."

323. CHS attached as an exhibit to its press release a copy of a presentation entitled

"Community Health Systems and Tenet Healthcare: A Compelling Opportunity For Value


Creations." 10 The presentation, among other things, discussed the "significant synergy potential"

between CHS and Tenet. CHS also stated that the "Transaction Benefits Key Constituents,"

including patients, who would experience "[i]mproved quality of care from standardized best

practices and clinical protocols."

324. These statements concerning superior operating performance and synergies were

materially false and misleading in light of CHS' s failure to disclose that, for at least a decade, the

number of patients admitted into CHS hospitals was the product of CHS's improper practices,

discussed in detail above, to drive patient admissions despite the absence of a clinical basis for

these patients to be admitted into the hospital. Specifically, CHS failed to disclose that CHS had

engaged in an effort to increase its patient admissions through implementation of the improper

admission practices that, under industry standard clinical criteria, should have been treated in

observation. These undisclosed practices exposed Medicare and other payers to millions of

dollars of improper additional costs. CHS' s purported reputation as a successful operator and

acquirer was based on this same improper conduct.

325. On December 10, 2010, CHS hosted an analyst call to discuss CHS's proposed

acquisition of Tenet. On the call, Defendant Smith touted CHS ' s "proven track record of

unmatched operating performance," including through CHS's acquisition of Triad, which CHS

"successfully integrated." In particular, Smith claimed that CHS was able to,effective1y integrate

Triad because "we have a very standardized, centralized platform, operating platform."

326. The foregoing representations were materially false and misleading in light of the

same material omissions concerning CHS's admissions practices set forth above. In particular,

Defendants failed to disclose the improper admission practices, the decreased rate of observation,

10 In this filing, CHS acknowledged that "The Company and its directors and executive officers and other persons may be deemed to be participants in any solicitation of proxies from Tenet's stockholders in respect of the proposed transaction with Tenet..."

{2499/CMP/00113578.DOCXv5} ill Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1536

and the increase in one-day stays at the Triad hospitals in the year following the acquisition. In

addition, these statements were materially false and misleading because Defendants failed to

disclose that CHS faced substantial potential liability due to its undisclosed admissions practices

and regulatory investigations relating thereto.

327. On December 20, 2010, CHS issued a press release, which it filed with the SEC,

announcing that it was commencing a proxy contest to take control of Tenet Board of Directors,

at Tenet's upcoming 2011 annual meeting.

328. On January 11, 2011 at the J.P. Morgan Healthcare Conference, Smith discussed,

inter alia, CHS's offer to buy Tenet as well as CHS's business strategy:

So when you think about us, we think we have a very clear executable strategy. It's predictable. It's sustainable, as we've proven over the last 10 years.....

And definitely we've a proven operating permanent strategy that works with consistent financial performance and margin improvement.

(Emphasis added).

329. During the January 11th Conference, Smith stated that CHS is an "Industry

Leader in Admissions Growth," and provided data purported to reflect that CHS's admissions

and adjusted patient admissions had grown in every year from 2000 to 2009. In addition, CHS

stated that one of its "Significant Opportunities for Growth in Revenue and Operating Profit" is

to "Increase Inpatient ER Visits." CHS further stated that it "ER Strategy" has "[c]ontributed to

same store admission growth." Moreover, with regard to its operating strategy, CHS made

statements about its purported success at "Improv[ing] Hospital Operations" through

"Standardization and Centralization," including CHS' s "Billing and Collections" and

"Quality/Resource/Case Management" functions. Smith also stated that CHS had a "very sound

operating strategy," a "very clear executable strategy, [that] is predictable, [and] is sustainable,


as we've proven over the last ten years," and a "proven operating ... strategy that works with a

consistent financial performance and margin improvement."

330. The statements in 11328-329 were materially false and misleading in light of

CHS ' s failure to disclose that its admissions numbers, ER strategy, and operating strategy

depended on CHS's improper admissions practices, discussed in detail above. Specifically, CHS

failed to disclose that CHS had engaged in a systemic practice of increasing its patient

admissions through implementation of the Blue Book criteria that resulted in the admission of

patients into CHS hospitals who, under industry standard clinical criteria, should have been

treated in observation. Defendants also failed to disclose that its "ER strategy" included

programming Pro-MED to generate tests and procedures that were not clinically necessary in

order to raise patient acuity levels as detailed above to justify unwarranted inpatient admissions.

CHS also failed to disclose the substantially potential financial liability it faces from these

admissions practices and from the ongoing regulatory investigations related thereto.

331. During his January 11, 2011 presentation at the JP Morgan Investor Conference,

Smith also made affirmative representations about CHS' s success as an acquirer of hospitals, and

in particular, CHS's purported success in acquiring and integrating hospitals acquired from Triad

in 2007. In particular, Smith boasted that: "we've improved the margin about 280 basis points

and we got about $275 million of synergies put of those facilities."

332. Moreover, CHS provided data that purported to show, on a revenue and EBITDA

basis, that hospitals acquired by CHS performed better after being acquired by CHS. CHS

further stated that "CHS Management Significantly Improved Triad's Operating Results," and

that CHS had "[s]uccessfully integrated [the] Triad acquisition."

333. The statements in 11331-332 were materially false and misleading in light of


CHS ' s failure to disclose that the positive results after acquiring Triad were driven by CHS

implementing its admissions practices at former Triad hospitals, discussed in detail above, to


be admitted into the hospital.

334. On February 8, 2011, Defendant Smith delivered a presentation at the UBS

Global Healthcare Services Conference; excerpts of Smith's remarks at the UBS conference

were filed with the SEC. These material contained similar material misstatements as Smith

made in prior healthcare conferences. For example, Smith touted CHS's ability to improve

margins and performance in its acquired hospitals, citing the Triad acquisition as the primary

example. Smith also referred to the supposed "synergies" CHS achieved in the Triad acquisition

and asserted that, with respect to Tenet, there "is a lot of opportunity in terms of the synergies."

335. These statements were materially false and misleading in light of CHS's failure to

disclose that its results after acquiring Triad were driven by CHS implementing its improper

admissions practices at former Triad hospitals, discussed above, designed to drive up inpatient

admissions despite the lack of clinical basis for these patients to be admitted into the hospital

rather than observed.

336. On February 24, 2011 CHS issued a release announcing its financial and

operating results for the thrçe months and year ending December 31, 2010 (the "Q4 2010

Earnings Release"). The Company reported net operating revenues of $3.4 billion, a 10.1

percent increase compared to $3.1 billion for the same period of the prior year. The Company

further reported a net income of $69.5 million, or $0.76 diluted earnings per share for the quarter,

compared to $65.1 million, or $0.70 diluted earnings per share for the same period of the prior

year. CHS also reported a 2.0% increase in total admissions and a 5.1% increase in total


adjusted admissions, compared to the same period of the prior year.

337. Commenting on the 2010 results, CEO Smith stated:

The fourth quarter marked a very strong finish to 2010, as we reported the highest quarterly net operating revenues of the year. Our consistent pattern of growth reflects our success as an operator, especially in what has continued to be a challenging economic environment. For the year, net operating revenues increased by 7.3 percent for a record $13.0 billion, and net income was up by over 15 percent to $280.0 million, or $3.01 per diluted share, another record for Community Health Systems. This demonstrates that our centralized operating strategy has achieved favorable results across our markets as we have continued to focus on driving operating synergies at the individual hospital level, especially at our more recently acquired facilities.

We continued to expand our portfolio of hospitals in 2010 with a very selective acquisition strategy. We believe there are a growing number of independent hospitals that fit our criteria and can benefit from having a proven operator manage their facilities. With the ongoing uncertainties in the economy, and especially with respect to healthcare regulation, we believe there are even greater opportunities ahead for Community Health Systems to make suitable acquisitions. We can provide the experience and operating expertise with a proven track record as a valued partner in each of the communities we serve. As we look ahead to 2011, we will continue to deliver on our commitment of quality healthcare close to home.

(Emphasis added).


which was signed by CEO Smith and CFO Cash (the "2010 Form 10-K"). In addition, the

Company made substantially similar statements to those stated above in 11228, 230-233 in its

2010 Form,10-K at pp. 2-3, 5, 13, 23.

339. On February 25, 2011, CHS held a fourth quarter 2010 earnings call. On the call,

Cash reported that same-store admissions decreased 2.8% due in part to "reductions in one-day

stays with a corresponding increase in outpatient observations."

340. On the same earnings call, Smith acknowledged a "national trend" toward

observation, and explained that "[i]nsurers are trying to figure out ways to reduce costs." Smith


suggested however, that the trend away from inpatient stays would have little impact on CHS's

revenues given that "there are certain insurance companies that payment on observation is

essentially the same as when [patients] stay."

341. On the same earnings call Smith reiterated that the trend was "an industry-wide

issue, and I don't see anything that's problematic for us... .It's just a change in location

basically."

342. The foregoing representations in 191336 -341, supra, were materially false and

misleading because contrary to Smith's statements and suggestion that there was little cost

differential to the payor between billing a for a one-day stay as opposed to observation, and that

the difference between an admission and observation is merely a change in "location," in fact

CHS earns an average of approximately $3,500 more per patient for CHS's highest volume and

lowest acuity admitted Medicare patients than CHS would earn if these patients had been treated

in observation, and for many patients, the spread is far higher. This substantial differential

translates over a several year period to hundreds of millions of dollars, according to Tenet

experts.

343. These statements were also materially false and misleading in light of

Defendants' failure to disclose that the Company was far more vulnerable than its peers in the

industry to pressure from payers to shift admitted patients to observation status because CHS

vastly underutilized observation status by design as compared to CHS' s peer hospital operators.

344. In addition, these statements were materially false and misleading because,

despite experiencing a decrease in overall same-store admissions due to pressure from managed

care providers to reduce one-day stays, CHS failed to disclose that, in large part, the Company

continued to implement its undisclosed strategies, including the Blue Book's aggressive, non-


industry standard admissions criteria, programming Pro-MED to generate tests and procedures

that were not clinically necessary, and a quota incentive system, which had cumulative the effect

of drastically increasing the number of one-day stays while decreasing the observation rate. As a

result, admissions through the ED continued to rise.

345. These statements were also materially false and misleading because of Smith's

failure to disclose the very material risk of financial liability for improper billing under

Medicare. In particular, the penalties for improperly billing Medicare include treble damages

and a penalty of up to $11,000 per false claim, plus the risk of exclusion from the Medicare

program.

346. Smith also made statements during the earnings call concerning CHS's "success

as an operator and consolidator in the industry" that CHS had "continued to focus on improving

performance at the individual hospital level in all our markets, especially at our most recently

acquired facilities," and that CHS had "proven operational efficiencies." These statements were

materially false and misleading in light of CHS's failure to disclose that its success as an

acquirer, its operational performance and its "efficiencies" were dependent upon its undisclosed

and unsustainable admissions practices discussed in detail above.

347. On March 1, 2011, Smith delivered a presentation at the Citi Global Healthcare

Conference. A copy of the presentation and excerpts of Smith's remarks was filed with the SEC.

These materials contained numerous materially false and misleading statements, similar to those

contained in the JP Morgan Investor Conference on January 11, 2011. Smith also touted CHS's

ability to improve margins and performance in its acquired hospitals, citing the Triad acquisition

as the primary example.

348. These statements were materially false and misleading in light of Defendants'


failure to disclose that its results after acquiring Triad were driven by CHS implementing its

improper admissions practices at former Triad hospitals, discussed in detail above.

349. On March 2, 2011, Smith and Cash spoke at the RBC Capital Markets Healthcare

Conference. CHS filed with the SEC excerpts of Smith's and Cash's remarks at the conference.

Specifically, Smith and Cash touted CHS 's ability to improve margins and performance in its

acquired hospitals, citing the supposed "synergies" that CHS realized through the Triad

acquisition as the primary example, and asserting that CHS would realize similar synergies by

acquiring Tenet.

350. These statements were materially false and/or misleading in light of Defendants'

failure to disclose that its results after acquiring Triad were driven by CHS implementing its

improper admissions practices at former Triad hospitals, as discussed above.

CLASS ACTION ALLEGATIONS

351. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and 23(b)(3) on behalf of the Class, which consists of all those who purchased

or otherwise acquired CHS common stock during the Class Period and were damaged thereby.

Excluded from the Class are Defendants herein, the officers and directors of the Company at all

relevant times, members of their immediate families and their legal representatives, heirs,

successors or assigns, and any entity in which Defendants have or had a controlling interest.

352. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, CHS common stock was actively traded on the

NYSE. While the exact number of Class members is unknown to Plaintiff at this time and can

be ascertained only through appropriate discovery, Plaintiff believes that there are hundreds or

thousands of members in the proposed Class. Members of the Class may be identified from

12499 I CMP / 001 13578.DOCX v5 ) 118 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1543

records maintained by CHS or its transfer agent and may be notified of the pendency of this

action by mail, using the form of notice similar to that customarily used in securities class

actions.

353. Plaintiff's claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by Defendants' wrongful conduct in violation of

federal law that is complained of herein.

354. Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.

Plaintiff has no interests antagonistic to or in conflict with those of the Class.

355. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by Defendants' acts as alleged herein;

(b) whether statements made by Defendants to the investing public during the Class Period misrepresented material facts about the business, operations, and management of CHS;

(c) whether the Individual Defendants caused CHS to Issue false and misleading financial statements during the Class Period;

(d) whether Defendants acted knowingly or recklessly in issuing false and misleading financial statements;

(e) whether the prices of CHS common stock during the Class Period were artificially inflated because of the Defendants' conduct complained of herein; and

(f) whether the members of the Class have sustained damages and if so, what is the proper measure of damages.

356. A class action is superior to all other available methods for the fair and efficient


adjudication of this controversy because joinder of all members is impracticable. Furthermore,

as the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

357. Plaintiff will rely, in part, upon the presumption of reliance established by the

fraud-on-the-market doctrine in that:

(a) Defendants made public misrepresentations or failed to disclose material facts during the Class Period;

(b) the omissions and misrepresentations were material;

(c) CHS common stock is traded in efficient markets;

(d) the Company's shares were liquid and traded with moderate to heavy volume during the Class Period;

(e) the Company's common stock traded on the NYSE, and the Company received coverage by numerous securities analysts;

(f) the misrepresentations and omissions alleged would tend to induce a reasonable investor to misjudge the value of the Company's common stock; and

(g) Plaintiff and members of the Class purchased and/or sold CHS common stock between the time the Defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the omitted or misrepresented facts.

358. Based upon the foregoing, Plaintiff and the members of the Class are entitled to a

presumption of reliance upon the integrity of the market.

LOSS CAUSATION/ECONOMIC LOSS

359. During the Class Period, as detailed herein, Defendants made false and


misleading statements, and engaged in a scheme to deceive the market and a course of conduct

that artificially inflated the price of CHS common stock and operated as fraud or deceit on Class

Period purchasers of CHS common stock. Later, when Defendants' material misrepresentations

and omissions became apparent to the market subsequent to the revelations made by Tenet, the

price of CHS stock fell precipitously. As a result of their purchases of CHS common stock

during the Class Period, Plaintiff and other members of the Class suffered economic loss, i.e.,

damages, under the federal securities laws.

OMMMMIAN

360. CHS' s verbal "Safe Harbor" warnings that accompanied its oral forward-looking

statements ("FLS") issued during the Class Period were ineffective to shield those statements

from liability.

361. Defendants are also liable for any false FLS pleaded because, at the time each

FLS was made, the speaker knew the FLS was false and the FLS was authorized and/or approved

by an executive officer of CHS who knew that the FLS was false. None of the historic or

present-tense statements made by Defendants were assumptions underlying or relating to any

plan, projection, or statement of future economic performance, as they were not stated to be such

assumptions underlying or relating to any projection or statement of future economic

performance when made, nor were any of the projections or forecasts made by Defendants

expressly related to, or stated to be dependent on, those historic or present tense statements when

made.

(2499/CMP/00113578.DOCX v5) 121 Case 3:11-cv-00433 Document 68 Filed 07/13/12 of 130 PageID #: 1546

CLAIMS FOR RELIEF

COUNT I

Against All Defendants for Violations of

Section 10(b) and Rule 10b-5 Promulgated Thereunder

362 Lead Plaintiff repeats and realleges each and every allegation contained above as

if fully set forth herein.

363. During the Class Period, Defendants engaged in a course of conduct, pursuant to

which they knowingly or recklessly engaged in acts, transactions, practices, and courses of

business that operated as a fraud and deceit upon Plaintiff and the other members of the Class;

and made various untrue statements of material facts and omitted to state material facts necessary

in order to make the statements made, in light of the circumstances under which they were made,

not misleading in connection with the purchase and sale of common stock. Such practices were

intended to, and, throughout the Class Period, did: (a) deceive the investing public, including

Lead Plaintiff and other Class members, as alleged herein; (b) artificially inflate and maintain the

market price of CHS common stock; and (c) cause Lead Plaintiff and other members of the Class

to purchase CHS common stock at artificially inflated prices. In furtherance of this course of

conduct, Defendants, and each of them took the actions set forth herein.

364. Information showing that the Individual Defendants acted knowingly, or with

reckless disregard for the truth, is peculiarly within knowledge and control, because as senior

officers and/or directors of CHS, the Individual Defendants had knowledge of the details of

CHS' s internal affairs and core operations.

365. Lead Plaintiff and the Class have suffered damages in that, in reliance on the

integrity of the market, they paid artificially inflated prices for CHS common stock. Lead

Plaintiff and the Class would not have purchased CHS common stock at the prices they paid, or


at all, had they been aware that the market prices were artificially and falsely inflated by

Defendants' misleading statements. The market price of CHS common stock declined sharply

upon public disclosure of the facts alleged herein to the injury of Plaintiff and Class members.

366. By reason of the conduct alleged herein, Defendants knowingly or recklessly,

directly or indirectly, have violated Section 10(b) of the Exchange Act and SEC Rule lOb-5

promulgated thereunder.

367. As a direct and proximate result of Defendants' wrongful conduct, Lead Plaintiff

and the other members of the Class suffered damages in connection with their respective

purchases and sales of the Company's securities during the Class Period.

COUNT II

Against the Individual Defendants for Violations of

Section 20(a) of the Exchange Act

368. Lead Plaintiff repeats and realleges each and every allegation contained above as

if fully set forth herein.

369. During the Class Period, the Individual Defendants participated in the operation

and management of CHS, and conducted and participated, directly and indirectly, in the conduct

of CHS's business affairs. Because of their senior positions, they knew the adverse non-public

information about CHS 's misstatements concerning CHS ' s improper admission practices and

unsustainable operating strategy.

370. As officers anchor directors of a publicly owned company, the Individual

Defendants had a duty to disseminate accurate and truthful information with respect to CHS 's

business practices, financial condition and results of operations, and to correct promptly any

public statements issued by CHS that had become materially false or misleading.

371. Because of their positions of control and authority as senior officers, the


Individual Defendants were able to, and did, control the contents of the various reports, press

releases, and public filings that CHS disseminated in the marketplace during the Class Period, as

well as statements made during earnings and securities and healthcare analysts conference calls.

Throughout the Class Period, the Individual Defendants exercised their power and authority to

cause CHS to engage in the wrongful acts complained of herein. The Individual Defendants

therefore, were "controlling persons" of CHS within the meaning of Section 20( a) of the

Exchange Act. In this capacity, they participated in the unlawful conduct alleged which

artificially inflated the market price of CHS securities.

372. Each of the Individual Defendants, therefore, acted as a controlling person of

CHS. By reason of their senior management positions and/or being directors of CHS, each of the

Individual Defendants had the power to direct the actions of, and exercised the same to cause,

CHS to engage in the unlawful acts and conduct complained of herein. Each of the Individual

Defendants exercised control over the general operations of CHS and possessed the power to

control the specific activities which comprise the primary violations about which Lead Plaintiff

and the other members of the Class complain.

373. By reason of the above conduct, the Individual Defendants are liable pursuant to

Section 20(a) of the Exchange Act for the violations committed by CHS.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff prays for judgment against Defendants as follows:

A. Declaring this action to be a proper class action pursuant to Rule 23 of the Federal

Rules of Civil Procedure;

B. Requiring Defendants to pay damages sustained by Plaintiff and the Class by

reason of the acts and transactions alleged herein;


C. Awarding Lead Plaintiff and the other members of the Class pre- and post-

judgment interest, as well as their reasonable attorneys' fees, expert fees, and other costs; and

D. Awarding such other equitable and injunctive relief as this Court may deem just

and proper.

DEMAND FOR TRIAL BY JURY

Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Lead Plaintiff demands

trial by jury of all issues that may be so tried.

Dated: July 13, 2012

LOWEY DANNENBERG COHEN & HART, P.C.

By: Is! Barbara J. Hart Barbara J. Hart (admitted pro hac vice) David C. Harrison (admitted pro hac vice) Scott V. Papp (admitted pro hac vice) One North Broadway, Suite 509 White Plains, NY 10601 Tel: (914) 997-0500 Fax: (914)997-0035 E-mail: [email protected]

Attorneys for Lead Plaintiff

BUTLER, SNOW, O'MARA, STEVENS & CANNADA, PLLC

T. Harold Pinkley 1200 One Nashville Place 150 Fourth Avenue North Nashville, TN 37219-2433 Tel: (615) 503-9100 Fax: (615)503-9101 E-mail: [email protected]

Local Counsel


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